<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 2000
REGISTRATION NOS. 33-2081
811-04490
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 26 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 26 [X]
JOHN HANCOCK VARIABLE SERIES TRUST I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
JOHN HANCOCK PLACE
P.O. BOX 111
BOSTON, MASSACHUSETTS 02117
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(617) 572-5060
(REGISTRANT'S TELEPHONE NUMBER)
RONALD J. BOCAGE, ESQUIRE
JOHN HANCOCK PLACE
P.O. BOX 111
BOSTON, MASSACHUSETTS 02117
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
THOMAS C. LAUERMAN, ESQUIRE
FREEDMAN, LEVY, KROLL & SIMONDS
1050 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
It is proposed that this filing will become effective (check appropriate box)
[_] Immediately upon filing pursuant to paragraph (b)
[_] On May 1, 2000 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[X] On June 30, 2000 pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] On (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
SUPPLEMENT DATED JUNE 30, 2000
TO
PROSPECTUS DATED MAY 1, 2000
The prospectus for the John Hancock Variable Series Trust I is hereby amended
as follows:
. The American Leaders Large Cap Value Fund and the Core Bond Fund are added
to the John Hancock Variable Series Trust I and the Goal and Strategy,
Subadviser, Past Performance, Main Risks and Financial Highlights of each
Fund, as set forth on pages 2 through 5 of this Supplement, are added to
the prospectus.
. The pages of the prospectus that describe the Goal and Strategy,
Subadviser, Past Performance, Main Risks and Financial Highlights of the
Real Estate Equity Fund are deleted and replaced by the material on pages 6
and 7 of this Supplement. The material on pages 6 and 7 of this Supplement
describe a new "multi-manager" approach for the Real Estate Equity Fund.
. The Section of the prospectus entitled "Funds' Expenses," which states that
the advisory fee paid by the Real Estate Equity Fund to the adviser last
year was 0.60% of net assets, is amended by adding the following language:
"The American Leaders Large Cap Value Fund and the Core Bond Fund were not
in operation last year. Those funds pay fees to the advisor (as a percent-
age of net assets) as follows:
. American Leaders Large Cap Value: 0.80% of first $50 million; 0.65% of
next $200 million; 0.60% of next $250 million; 0.55% above $500 million.
. Core Bond: 0.70% of first $25 million; 0.65% of next $25 million; 0.60%
of next $100 million; 0.55% above $150 million."
. The second paragraph of the Section of the prospectus entitled "Dividends
and Taxes" is amended to read as follows:
"Each fund declares and pays dividends monthly, except that the Small/Mid
Cap Growth Fund does so annually and the Money Market Fund does so daily."
The American Leaders Large Cap Value Fund and the Core Bond Fund are subject to
all provisions of the prospectus that are applicable to all funds of the John
Hancock Variable Series Trust I, including the following provisions:
RISKS OF FUNDS
These funds, like all mutual funds, are not bank deposits. They are not in-
sured or guaranteed by the FDIC or any other government agency. You could lose
money by investing in these funds. So, be sure to read all risk disclosure
carefully before investing.
MANAGEMENT
John Hancock is the investment advisor of each fund. John Hancock is a Massa-
chusetts stock life insurance company. On February 1, 2000, John Hancock
changed its form of organization and its name. Prior to that date, it was John
Hancock Mutual Life Insurance Company, a mutual life insurance company that
was chartered in 1862. At the end of 1999, John Hancock managed approximately
$127 billion, of which John Hancock owned over $71 billion. Most of the funds
have subadvisers.
<PAGE>
American Leaders Large Cap Value Fund
GOAL AND STRATEGY
This is a large cap stock fund with a value emphasis that seeks long-term
growth in capital and dividend income.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer favorable prospects for
increasing dividends and growth in capital.
The manager selects stocks using a combination of quantitative screening tools
and fundamental equity research.
The manager employs quantitative screening tools to identify companies that
are:
. leading their industries in terms of sales earnings and/or market
capitalization;
. exhibiting low price-to-earnings ratios relative to historical levels;
. trading at reasonable prices relative to growth expectations;
. generating strong cash flow relative to stock price; and
. not experiencing negative earnings revision trends or poor stock price
momentum.
The manager employs fundamental equity research to confirm the screening
process and to examine the company's:
. financial health;
. business and product strength;
. competitive position; and
. management strength.
The Fund's sector weightings are broadly diversified and managed relative to
the broad large-cap equity market.
The Fund normally invests in 70 to 120 stocks, with at least 65% (usually
higher) of its assets in U.S. large cap companies. The Fund normally has 10%
or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American
Depository Receipts (ADRs), and certain derivatives (investments whose value
is based on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive
measures--such as holding unusually large amounts of cash and cash
equivalents--that are inconsistent with the Fund's primary investment
strategy. In taking those measures, the Fund may not achieve its investment
goal.
-------------------------------------------------------------------------------
SUBADVISER
Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222
Owned by Federated Investors, Inc.
Managing since 1955
Managed approximately $125 billion in assets at the end of 1999
FUND MANAGERS
Michael P. Donnelly, CFA
-----------------
Senior Vice President of subadviser
Joined subadviser in 1989
Began career in 1985
Kevin R. McCloskey, CFA
-----------------
Vice President of subadviser
Joined subadviser in 1999
Portfolio Manager at Killian Asset Management
Corp. (1994-1999)
Began career in 1994
PAST PERFORMANCE
This is a new Fund. It was not in operation prior to the date of this
prospectus.
2
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are
concentrated in certain sectors, the Fund's performance could be worse than
the overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value"
stocks will underperform "growth" stocks. Also, the Fund's "large cap"
approach carries the risk that in certain markets large cap stocks will
underperform small cap and mid cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally
considered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
-------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--This is a new Fund. It was not in operation prior to the
date of this prospectus.
3
<PAGE>
Core Bond Fund
GOAL AND STRATEGY
This ia a bond fund that seeks income and growth in capital.
This is considered an "intermediate" bond fund in that it maintains an average
bond maturity which is typically between four and ten years.
The Fund primarily invests in a diversified mix of debt securities, including:
. U.S. Treasury and agency securities;
. foreign government and agency securities (if dollar denominated);
. corporate bonds, both U.S. and foreign (if dollar denominated); and
. mortgage-backed and asset-backed securities.
The manager normally invests:
. mostly in investment grade debt securities;
. no more than 15% of its assets in high yield bonds; and
. no more than 25% of its assets in U.S. dollar denominated foreign
securities, excluding Canadian securities.
The manager makes ongoing decisions regarding the Fund's average maturity,
sector exposures and yield curve exposures. The manager uses proprietary
research and economic analysis to try to anticipate interest rate movements
and to identify sectors and specific bonds that are undervalued. The manager
examines a variety of factors, including macroeconomic analysis and corporate
earnings analyses, to determine which business sectors and credit ratings are
most advantageous for investment. The manager evaluates bonds of all quality
levels and maturities from many different sectors and issuers. The Fund
normally has an average credit quality rating of "A" or higher.
The manager actively manages the Fund's interest rate sensitivity by adjusting
the Fund's average bond maturity. The Fund's average bond maturity may
therefore differ from that of the overall bond market (as represented by such
indices as the Lehman Brothers Aggregate Bond Index). The Fund normally
invests at least 65% (usually higher) of its assets in bonds. The Fund
normally has 10% or less of its assets in cash and cash equivalents.
The manager may use derivatives (investments whose value is based on indices
or other securities) such as futures to manage the Fund's average maturity and
interest rate volatility.
The Fund may purchase other types of securities, for example: foreign bonds of
developed markets denominated in foreign currencies, and emerging market debt
securities.
In abnormal market conditions, the Fund may take temporary defensive
measures--such as holding unusually large amounts of cash and cash
equivalents--that are inconsistent with the Fund's primary investment
strategy. In taking those measures, the Fund may not achieve its investment
goal.
-------------------------------------------------------------------------------
SUBADVISER
Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222
Owned by Federated Investors, Inc.
Managing since 1955
Managed approximately $125 billion in assets at the end of 1999
FUND MANAGERS
Joseph M. Balestrino, CFA
-----------------
Senior Vice President of subadviser
Joined subadviser in 1986
Began career in 1986
Donald T. Ellenberger, CFA
-----------------
Vice President of subadviser
Joined subadviser in 1996
Portfolio Manager/Trader at Mellon Bank N.A. (1986-1996)
Began career in 1984
Mark E. Durbiano, CFA
-----------------
Senior Vice President of subadviser
Joined subadviser in 1982
Began career in 1982
PAST PERFORMANCE
This is a new Fund. It was not in operation prior to the date of this prospec-
tus.
4
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will
generally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has more interest rate risk than a short-term bond fund,
but less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its
obligation to pay interest and repay principal. Also, the credit rating of a
bond held by the fund may be downgraded. In either case, the value of the bond
held by the Trust would fall. All bonds have some credit risk, but in general
lower-rated bonds have higher credit risk.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that
brokerage commissions and other transaction costs will have on the fund's
performance. Any turnover rate in excess of 100% is considered relatively
high. Normally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, po-
litical and social instability. Factors such as lack of liquidity, foreign
ownership limits and restrictions on removing currency also pose special
risks. All foreign securities have some degree of foreign risk. However, to
the extent the Fund invests in emerging market countries, it will have a sig-
nificantly higher degree of foreign risk than if it invested exclusively in
developed or newly-industrialized countries.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if
interest rate movements cause the Fund's mortgage-related and callable
securities to be paid off substantially earlier than expected.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct fixed income investments. Also, in a down mar-
ket, derivatives could become harder to value or sell at a fair price.
-------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--This is a new Fund. It was not in operation prior to the
date of this prospectus.
5
<PAGE>
Real Estate Equity Fund
GOAL AND STRATEGY
This is a real estate stock fund that seeks above-average income and long-term
growth in capital.
The Fund invests primarily in:
. equity securities of real estate investment trusts (REITs) that own commer-
cial and multi-family residential real estate; and
. equity securities of real estate operating companies (i.e., companies with at
least 75% of revenue, income or fair asset value derived from real estate).
The Fund employs two subadvisers, each of which independently selects and con-
structs a portfolio for its portion of the Fund. Each sub-adviser employs its
own investment approach to identify securities considered attractive and to
construct and manage its portion of the Fund. On or about June 30, 2000, the
assets of the Fund were evenly divided between the subadvisers. All subsequent
investments in and redemptions from the Fund will be evenly divided between the
subadvisers.
Independence Investment Associates, Inc. ("IIA") selects real estate stocks us-
ing a combination of proprietary, equity research and quantitative tools. Real
estate stocks are purchased that are undervalued relative to the stock's his-
tory and the market and have improving earnings growth prospects.
IIA employs risk control techniques to maintain risk, style and industry char-
acteristics similar to the public equity real estate market. IIA will normally
invest in 40 to 60 securities in its portion of the Fund.
Morgan Stanley Dean Witter Investment Management Inc. ("MSDW") selects real es-
tate stocks using a combination of:
. top-down, market overview to identify undervalued property sectors and geo-
graphic regions; and
. proprietary, fundamental equity research to select companies that are attrac-
tively priced relative to the value of their underlying real estate assets.
MSDW seeks to maintain broad exposure to key property sectors (i.e., apart-
ments, retail and office/industrial). MSDW will normally invest in 30 to 50 se-
curities in its portion of the Fund.
Each portion of the Fund normally has at least 65% (usually higher) of its as-
sets invested in real estate equity securities and 5% or less of its assets in
cash and cash equivalents.
Each portion of the Fund also may purchase other types of securities, for exam-
ple: American Depository Receipts (ADRs), convertible securities, and equity
securities of non-real estate businesses whose real estate holdings are signif-
icant in relation to their market capitalization.
In abnormal market conditions, each portion of the Fund may take temporary de-
fensive measures--such as holding unusually large amounts of cash and cash
equivalents--that are inconsistent with the Fund's primary investment strategy.
In taking those measures, the Fund may not achieve its investment goal.
--------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
Fund Managers
John F. DeSantis
-----------------
Executive Vice President of subadviser
Managed fund since 1999
Joined subadviser in 1982
Thomas D. Spicer
-----------------
Vice President of subadviser
Managed fund since 1999
Joined team in 1996
Joined subadviser in 1991
SUBADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Managing since 1975
Managed approximately $184 billion in assets at the end of 1999
Fund Managers
Theodore R. Bigman
-----------------
Managing Director, Global Real Estate, of subadviser
Joined subadviser in 1995
Douglas A. Funke
-----------------
Vice President of subadviser
Joined subadviser in 1995
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1990 -21.00%
1991 33.50%
1992 16.00%
1993 17.29%
1994 2.86%
1995 12.31%
1996 33.07%
1997 17.22%
1998 -16.71%
1999 -1.69%
Best quarter: up 25.82%, first quarter 1991 Worst quarter: down 17.37%, third
quarter 1990
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -1.69% -3.19%
5 years 7.48% 8.30%
10 years 7.73% 4.11%
Life of fund 7.71% 4.52%
</TABLE>
Index: Wilshire Real Estate Securities Index
6
<PAGE>
MAIN RISKS
Primary
Real Estate Securities Risk: Real estate investment trusts (REITs) or other
real estate-related equity securities may be affected by changes in the value
of the underlying property owned by the trust. Mortgage REITs may be affected
by the quality of any credit extended. Other potential risks include the pos-
sibility of a REIT failing to qualify for tax-free pass-through of income un-
der the Internal Revenue Code or failing to maintain exemption under the In-
vestment Company Act of 1940.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up an down in value more than bonds. Because the Fund's investments are con-
centrated in the real estate sector, the Fund's performance could be worse
than the overall market.
Manager Risk: The managers and their respective strategies may fail to produce
the intended results. The Fund could underperform its peers or lose money if
the managers' investment strategies do not perform as expected.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are,
the more likely it is a specific security's poor performance will hurt the
fund significantly.
Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Interest Rate Risk: The Fund is subject to interest rate risk, which is the
possibility that changes in interest rates could hurt REIT performance. In
general, during periods of high interest rates, REITs may lose some of their
appeal for investors who may be able to obtain higher yields from other in-
come-producing investments, such as long-term bonds. Higher interest rates
also mean that financing for property purchases and improvements is more
costly and difficult to obtain.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
None
-------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated):
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $11.16 $ 11.70 $ 14.64 $ 15.91 $ 12.46
Income from investment
operations:
Net investment income (loss) 0.77 0.76 0.77 0.77 0.78
Net realized and unrealized
gain (loss) on investments* 0.54 2.97 1.68 (3.38) (0.99)
Total from investment
operations 1.31 3.73 2.45 (2.61) (0.21)
Less distributions:
Distributions from net
investment income and capital
paid in (0.77) (0.76) (0.71) (0.70) (0.78)
Distributions from net realized
gain on investments sold -- (0.03) (0.41) (0.14) --
Distributions in excess of
income, capital paid in &
gains -- -- (0.06) -- --
Total distributions $(0.77) $ (0.79) $ (1.18) $ (0.84) (0.78)
Net asset value, end of period $11.70 $14.64 $ 15.91 $ 12.46 $ 11.47
Total investment return 12.31% 33.07% 17.22% (16.71)% (1.69)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $9,301 $10,325 $12,830 $12,263 $11,000
Ratio of expenses to average net
assets (%) 0.73% 0.69% 0.69% 0.69 % 0.70%
Ratio of net investment income
(loss) to average net assets
(%) 6.85% 6.14% 5.12% 5.48 % 6.38%
Turnover rate (%) 19.81% 18.37% 20.04% 22.69 % 12.95%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of
purchase and withdrawals of shares in relation to the fluctuation in market
values of the fund.
7
<PAGE>
JOHN HANCOCK
VARIABLE SERIES TRUST I
STATEMENT OF ADDITIONAL INFORMATION
June 30, 2000
This Statement of Additional Information is not a prospectus. It is
intended that this Statement of Additional Information be read in conjunction
with the Prospectus of John Hancock Variable Series Trust I, dated May 1, 2000
and June 30, 2000. A copy of the Prospectus may be obtained from John Hancock
Variable Series Trust I, John Hancock Place, P.O. Box 111, Boston, Massachusetts
02117, telephone number 1-800-REAL LIFE.
This Statement of Additional Information relates to all thirty-three of the
Trust's current "Funds."
The Trust's Financial Statements and Investment Performance Information
The Trust's financial statements appearing in its Annual Report to contract
holders and the report of Ernst & Young LLP, independent auditors of the Trust,
which appears therein, are incorporated by reference into this Statement of
Additional Information. The information about the total investment returns
achieved by the Trust's various Funds, is also incorporated herein by reference.
No other portions of the Annual Report are incorporated by reference. A free
copy of the Annual Report to contract holders may be obtained by writing to the
address or calling the number above.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in this
Statement of
Additional
Information
-----------
<S> <C>
The Trust's Financial Statements and Performance Information 1
What Is the Trust? 4
The Trust's Business History 4
The Funds' Investment Activities and Their Risks 5
1. Investing in Money Market Instruments 5
2. Investing in Other Fixed Income Obligations 5
3. Investing in Equity Securities 7
4. Investing in Real Estate Securities 9
5. Investing in Foreign Securities 9
6. Using Forward Exchange Contracts to Manage Currency 11
Exposure
7. Using Options on Currencies to Manage Currency Exposure 12
8. Using Currency Futures Contracts and Options
Thereon to Manage Currency Exposure 12
9. Using Certain Other Derivative Instruments to Manage
Currency Exposure 12
10. Using Foreign Currency Exposure Management Strategies
(General Considerations and Risks) 13
11. Reallocating a Fund's Assets Among Asset Classes 13
12. Adopting a Temporary Defensive Strategy 13
13. Investing With an Index-Based Objective 14
14. Investing on a Non-Diversified Basis 16
15. Using Options (Generally) 16
16. Using Options on Securities in Certain Conservative
Investment Strategies 18
17. Using Financial Futures Contracts, Options on Such Contracts
and Options on Stock Indexes (General Considerations) 18
18. Using Financial Futures, Options Thereon, and Stock Index
Options for Certain Hedging - Type Strategies 20
19. Using Options and Futures in Potentially More Aggressive
Strategies 21
20. Limiting the Funds' Exposure to Certain Futures and Option
Transactions 23
21. Using Other Types of Derivative Instruments 23
22. Investing In Other Investment Companies 25
23. Purchasing "When Issued" Securities and Forward
Commitments 25
24. Short-Term Trading 26
25. Entering Into Repurchase Agreements 26
26. Participating in Joint Trading Accounts 26
27. Lending of Fund Securities 27
28. Using Reverse Repurchase Agreements and Mortgages
"Dollar Rolls" 27
29. Investing in Rule 144A and Illiquid Securities 28
The Funds' Fundamental Investment Restrictions 28
Board of Trustees and Officers of the Trust 31
</TABLE>
2
<PAGE>
TABLE OF CONTENTS - continued
<TABLE>
<CAPTION>
Page in this
Statement of
Additional
Information
-----------
<S> <C>
Investment Advisory Arrangements 33
The Trust's Investment Advisory Arrangements With
John Hancock 33
The Trust's Arrangements With Subadvisers 35
Dollar Amounts of Advisory Fees, Subadvisory Fees, and
Expense Reimbursements 39
Arrangements With Other Service Providers 40
Underwriting and Indemnity Agreement 40
Custody of the Trust's Assets 40
Subadministration Agreement With State Street Bank 41
Independent Auditors 41
Portfolio Transactions and Brokerage Allocation 42
Codes of Personal Conduct 45
Features of the Trust's Shares 45
Shareholder Meetings and Voting Rights 46
Sales and Redemptions of Fund Shares 47
Computing the Funds' Net Asset Value 48
Taxes 49
Information About Fund Performance 49
Legal Matters 50
Reports to Contractholders 50
Appendix A - Corporate Bond Ratings 51
</TABLE>
3
<PAGE>
WHAT IS THE TRUST?
John Hancock Variable Series Trust I, (the "Trust") is an open-end
management investment company. With the exception of the Large Cap Aggressive
Growth, Mid Cap Growth, Global Balanced and Global Bond Funds, each of the Funds
is a "diversified" Fund within the meaning of the Investment Company Act of 1940
(the "Investment Company Act").
Shares of the Trust are currently sold to John Hancock Variable Life
Accounts U, V, and S to support variable life insurance policies issued by John
Hancock Variable Life Insurance Company ("JHVLICO"); John Hancock Variable
Annuity Accounts U and V to support variable annuity contracts issued by John
Hancock Life Insurance Company ("John Hancock"); John Hancock Variable Annuity
Accounts I and JF to support variable annuity contracts issued by JHVLICO; John
Hancock Variable Life Insurance Account UV to support variable life insurance
policies issued by John Hancock; and Investors Partner Life Account IPL-1 to
support variable life insurance policies issued by Investors Partner Life
Insurance Company ("IPL"). It is anticipated that, in the future, Trust shares
may be sold to other separate investment accounts of JHVLICO, John Hancock and
IPL. Each of these separate accounts is hereinafter referred to as a "Separate
Account."
Because the Separate Accounts currently own all of the Trust's
shares, those Separate Accounts (or John Hancock, JHVLICO, and IPL) may be
deemed to control the Trust. John Hancock, JHVLICO and IPL, in turn, are all
directly or indirectly controlled by John Hancock Financial Services, Inc., a
publicly-traded holding company.
The Trust issues a separate series of shares of beneficial interest
for each Fund. Each share issued with respect to a Fund has a pro rata interest
in the net assets of that Fund. The assets of each Fund are charged with the
liabilities of that Fund and a proportionate share of the general liabilities of
the Trust.
THE TRUST'S BUSINESS HISTORY
The Trust is, in part, a successor to three Separate Accounts of
JHVLICO, as well as the six Separate Accounts of John Hancock described below.
On March 28, 1986, all of the investment assets and related liabilities of the
Variable Life Stock, Bond, and Money Market Accounts were transferred to what
are now the Growth & Income, Active Bond and Money Market Funds of the Trust,
respectively, in exchange for shares of those Funds.
On February 20, 1987, all of the investment assets and related
liabilities of six Variable Annuity Stock, Bond and Money Market Accounts were
transferred to what are now the Growth & Income, Active Bond and Money Market
Funds of the Trust, respectively, in exchange for shares of these Funds.
The Trust itself was incorporated on September 23, 1985, under the
laws of the State of Maryland and was reorganized as a Massachusetts business
trust effective April 29, 1988.
Over the years, several Funds have been re-named as follows:
Year of
Current Fund Name Prior Name(s) Change
----------------- ------------- ------
International Opportunities II Global Equity 2000
Active Bond Sovereign Bond 2000
Bond 1996
Global Balanced International Balanced 2000
Global Bond Strategic Bond 1999
Growth & Income Stock 1996
International Equity Index International Equities 1998
International 1995
Global 1994
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Year of
Current Fund Name - continued Prior Name(s) - continued Change
----------------------------- ------------------------- ------
Large Cap Growth Select Stock 1995
Short-Term Bond Short-Term U.S. Government 1998
Small/Mid Cap Growth Diversified Mid Cap Growth 1999
Special Opportunities 1998
THE FUNDS' INVESTMENT ACTIVITIES
AND THEIR RISKS
The different investment activities of the several Funds will affect
both their investment returns and the nature and degree of risks to which they
are exposed. Sections 1. - 29. below describe many (but not all) of these
investment activities and risks.
1. Investing in Money Market Instruments
The Money Market Fund invests exclusively in "money market"
instruments; all the other Funds may invest in these instruments to some extent.
These are high quality, short-term fixed income obligations. Because of their
nature, money market instruments generally do not carry significant risks of
loss. The principal risk is that a Fund's return on money market instruments
will be less than it would have earned on a riskier investment.
2. Investing in Other Fixed Income Obligations
The following Funds invested primarily in non-money market fixed
income (i.e., "debt") securities: the Short-Term Bond, Bond Index, Active Bond,
Core Bond, Global Bond, and High Yield Bond Funds. The Managed, Aggressive
Balanced and Global Balanced Funds can vary their holdings of these securities
within a broad range. All the other Funds (except the Money Market Fund) may
from time to time invest in non-money market debt to some extent.
Various types of risk associated with these securities are discussed
in the balance of this Section 2.
Interest rate risk: In general, debt securities with longer
maturities than money market instruments have exposure to interest rate risk.
Changes in generally prevailing market interest rates alter a debt security's
market value and introduce volatility into the rate of return of a Fund that
invests in such securities. When prevailing interest rates go up, the market
value of debt securities tends to go down and vice versa. This sensitivity of
the market value of a debt security to changes in interest rates is generally
related to the "duration" of the instrument. The market value of a shorter-term
fixed income security is generally less sensitive to interest rate moves than
that of a longer-term security. For example, the interest rate risk of the
Short-Term Bond Fund, although moderate, is below that of traditional
intermediate or long-term bond portfolios.
Credit risk: The value of a fixed income security may also change as
a result of market perceptions regarding its credit risk: i.e., the ability of
the borrower to repay its debts. The market value of a fixed income security can
fall when the market perceives the borrower to be less credit worthy.
Conversely, the market value of a fixed income security can increase due to its
borrower being perceived as financially stronger. All Funds that invest in
non-money market debt securities may have some exposure to credit risk.
Even some U.S. Government obligations have a degree of credit risk.
"U.S. Government obligations" are bills, certificates of indebtedness, notes and
bonds issued or guaranteed as to principal or interest by the United States or
by agencies or authorities controlled or supervised by and acting as
instrumentalities of the U.S. Government and established under the authority
granted by Congress. Some obligations of U.S. Government
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agencies, authorities, and other instrumentalities are supported by the full
faith and credit of the U.S. Treasury; others by the right of the issuer to
borrow from the Treasury; and others only by the credit of the issuing agency,
authority, or other instrumentality. These latter types of obligations,
therefore, do have a degree of credit risk. U.S. Government obligations are used
most in the Bond Index, Active Bond and Global Bond Funds. All of the other
Funds may also invest in U.S. Government obligations to some extent.
Securities having one of the four highest rating categories for debt
securities as defined by Moody's investors Services, Inc. (Aaa, Aa, A, or Baa)
or Standard and Poor's Corporation (AAA, AA, A, or BBB) or, if unrated,
determined to be of comparable quality by the subadviser, are referred to as
"investment grade." The meanings of such ratings are set forth in Appendix A to
this Statement of Additional Information. Lower-rated bonds have more credit
risk than higher rated bonds.
Risk of lower-quality instruments: High-yield bonds (or "junk" bonds)
are debt securities rated below "investment grade" as defined above. The value
of these lower rated securities generally is more subject to credit risk than is
the case for higher rated securities, and their values tend to respond more to
changes in market perceptions regarding their credit risk.
Investments in companies issuing high yield securities are considered
to be more speculative than higher quality instruments. As such, these
securities typically pay a higher interest rate than investment grade
securities.
Issuers of high yield securities are typically in weak financial
health, and their ability to pay back principal and interest on the bonds they
issue is uncertain. Some of these issuers may be in default or bankruptcy.
Compared with issuers of investment-grade bonds, they are more likely to
encounter financial difficulties and to be materially affected by these
difficulties when they do encounter them.
High yield bond markets may react strongly to adverse news about an
issuer or the economy, or to the perception or expectations of adverse news.
These debt securities may also have less liquid markets than higher rated
securities.
Judgment plays a greater role in valuing higher yield securities than
in the case of other securities for which more extensive quotations and
last-sale information are available. Adverse publicity and changing investor
perceptions may affect the ability of outside pricing services used by a Fund to
value its portfolio securities, and the ability of the Fund to dispose of its
lower-rated bonds.
The market prices of high yield securities may decline significantly
in periods of general economic difficulty, which may follow periods of rising
interest rates. During an economic downturn or a prolonged period of risking
interest rates, the ability of issuers of lower-rated debt to service their
payment obligations, meet projected goals, or obtain additional financing may be
impaired. In that case, a Fund may find it necessary, at its own expense or in
conjunction with others, to pursue litigation or otherwise exercise its rights
as a security holder to seek to protect the interests of security holders, if it
determines this to be in the interest of Fund investors. The 1980s saw a
dramatic increase in the use of high yield securities to finance highly
leveraged corporate acquisitions and restructurings. Past experience may not
provide an accurate indication of future performance of high yield securities,
especially during periods of economic recession. In fact, from 1989 to 1991, the
percentage of high yield securities that defaulted rose significantly above
prior levels.
All Funds (other than the Money Market Fund) that invest in debt
securities may at times have some exposure to high yield securities. The High
Yield Bond Fund intends to invest primarily in these securities. The other Funds
most likely to invest a significant portion of their assets in high yield
securities are the Short-Term Bond, Active Bond, and Core Bond Funds. The
Managed, Aggressive Balanced, Global Bond and Global Balanced Funds may also
invest in high yield securities to some extent. In contrast, the Bond Index Fund
will not invest in debt securities that are not at least investment grade at the
time of purchase.
Although not customarily referred to as "high yield" securities or
"junk bonds," debt securities that fall in the lowest rating within the
investment grade category are considered medium grade securities that have some
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<PAGE>
speculative characteristics. Accordingly, to a lesser degree, they may present
the same risks discussed above with respect to high yield securities.
The considerations discussed above for lower-rated debt securities
also are applicable to lower quality unrated debt instruments of all types,
including loans and other direct indebtedness of businesses with poor credit
standing. Unrated debt instruments are not necessarily of lower quality than
rated securities, but they may not be attractive to as many buyers.
Prepayment/Call risk: Prepayment risk is the risk that the obligor on
a debt security may repay or "call" the debt before it is due. Most mortgage
backed, asset backed, other public bond debt securities and 144A securities that
a Fund might own are exposed to this risk. U.S. Government securities have
minimal exposure to this risk. Prepayment/call is most likely to occur when
interest rates have declined and a borrower can refinance the debt at a lower
interest rate level. Generally, a Fund reinvests the proceeds resulting from
prepayments in a lower yielding instrument. This results in a decrease in the
Fund's current yield. The values of securities that are subject to
prepayment/call risk also tend to increase less in response to declining
interest rates and decrease more in response to increasing interest rates than
would the value of otherwise similar securities that do not have prepayment or
"call" features.
All Funds that invest in debt securities (other than the Money Market
Fund) may at times have some exposure to prepayment/call risk. The Funds most
likely to invest a significant portion of their assets in debt securities with
prepayment/call features are the Short-Term Bond, Core Bond, Bond Index, Active
Bond, Global Bond and High Yield Bond Funds. The Managed, Aggressive Balanced,
and Global Balanced Funds may also invest in these securities.
Risks of "zero coupon" instruments: All of the Funds may, in varying
degrees, invest in debt instruments that provide for payment of interest at the
maturity date of the instrument (or payment of interest in the form of
additional securities), rather than payment of interest in cash periodically
over the life of the instrument. The values of such instruments tend to respond
more to changes in interest rates than do otherwise comparable debt obligations
that provide for periodic interest payments. The Funds most likely to invest a
significant amount of their assets in instruments that are subject to this
volatility risk are the Managed, Aggressive Balanced, Real Estate Equity, Global
Balanced, Short-Term Bond, Core Bond, Bond Index, Active Bond, Global Bond, and
High Yield Bond Funds. However, all Funds that invest in debt securities may at
times have some exposure to this risk.
3. Investing in Equity Securities
All of the Funds intend to invest to some degree in common stock or
other equity securities, except for the Short-Term Bond, Core Bond, Bond Index,
Active Bond, Global Bond, and Money Market Funds. All of the Funds that invest
in equity securities expect to make such securities their primary investment
(except for the Managed, High Yield Bond and Global Balanced Funds, which may
nevertheless do so in the discretion of their subadvisers). Though investing in
equity securities, the Managed, Aggressive Balanced, and Global Balanced Funds
also expect, under normal conditions, to invest a substantial amount of their
assets in debt obligations.
General risks of investing in equity securities are discussed in the
balance of this Section 3.
Equity risk: Investments in common stock or other equity securities
historically have offered a higher rate of return than money market instruments
or longer term debt securities. However, the risks associated with equity
securities also tends to be higher, because the investment performance of equity
securities depends upon factors which are difficult to predict. The fundamental
risk associated with any equity portfolio is the risk that the value of the
investments it holds might decrease in value. Equity security values may
fluctuate in response to the activities of an individual company or in response
to general market, interest rate, and/or economic conditions.
Market capitalization risk: Another indication of the relative risk
of a common stock investment is the size of the company, which is typically
defined by reference to its "market capitalization." Market capitalization is
computed by multiplying current market price of a share of the company's stock
by the total number of its shares outstanding.
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<PAGE>
Investing in larger capitalization companies generally involves a
lesser degree of risk than investing in smaller capitalization companies.
Conversely, investing in the equity securities of smaller companies involves
greater risks and potential rewards than investing in larger, more established
companies. Small capitalization companies, in particular, often have limited
product lines, markets or financial resources, and they may depend upon a small
group of inexperienced managers. Investments in such companies can be both more
volatile and more speculative. These securities may have limited marketability
and are subject to more abrupt or erratic market movements than securities of
larger companies or the market in general.
Three capitalization levels are currently used by the Trust: large,
medium ("mid"), and small. Each of these capitalization levels will be defined
by reference to the Russell 3000(R) Index. The Russell 3000(R) Index Index is a
broad market index and is representative of the U.S. stock markets with a total
capitalization of $13.4 trillion at the end of 1999.1
. Large cap: Companies having a capitalization within the range of
the 300 largest companies in the Russell 3000(R) Index will be
considered to be large capitalization ("large cap") companies. At
the end of 1999, each of the largest 300 companies in the Russell
3000(R) Index had a capitalization greater than $ 7.9 billion.
. Mid cap: Companies having a capitalization within the range of
the 250 to 1000 largest companies in the Russell 3000(R) Index
will be considered to be "mid cap." At the end of 1999, such mid
cap companies had capitalizations ranging from $1.4 billion to
$9.7 billion.
. Small cap: Companies having a capitalization within the range of
the remaining companies in the Russell 3000(R) Index will be
considered to be small capitalization ("small cap") companies. At
the end of 1999, none of these smallest companies in the Russell
3000(R) Index had a market capitalization of more than $1.4
billion.
The above parameters for large cap, mid cap and small cap are adjusted at the
end of each calendar quarter to reflect changes in the market capitalization of
the Russell 3000(R) Index.
The equity securities of the Managed, Aggressive Balanced, Growth &
Income, Equity Index, Large Cap Value, American Leaders Large Cap Value, Large
Cap Value CORE, Large Cap Growth, Large Cap Aggressive Growth, International
Opportunities II, Global Balanced and International Equity Index Funds are
generally expected to represent primarily companies that qualify as large cap
issuers. These Funds also may invest in the equity securities of companies that
qualify as small and mid cap issuers.
The equity securities of the Large/Mid Cap Value, International
Equity and International Opportunities Funds are generally expected to represent
primarily large and mid cap issuers. These Funds also may invest in the equity
securities of companies that qualify as small cap issuers.
The equity securities of the Mid Cap Value, Mid Cap Growth,
Fundamental Mid Cap Growth, and Mid Cap Blend Funds are generally expected to
represent primarily companies that qualify as mid cap issuers. These Funds also
may invest in the equity securities of companies that qualify as small or large
cap issuers.
The equity securities of the Small/Mid Cap Value, Small/Mid Cap
Growth, and Small/Mid Cap CORE Funds are generally expected to represent
companies that are small cap and mid cap issuers. These Funds also may invest in
the equity securities of companies that qualify as large cap issuers.
--------------------------
1 The Russell 3000(R) Index is a service mark of Frank Russell Company, which
does not sponsor and is not in any way affiliated with the Trust. Inclusion in
the index in no way implies an opinion as to its attractiveness or
appropriateness as an investment.
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The Small Cap Value and Small Cap Growth Funds are generally expected
to invest primarily in equity securities of companies that qualify as small cap
issuers. Although these Funds also may invest significant amounts in the equity
securities of companies that qualify as mid cap issuers, it is expected that
they would rarely invest in the equity securities of companies that qualify only
as large cap issuers.
The Emerging Markets Equity Fund has broad latitude to invest in
companies of any size.
The Real Estate Equity Fund invests in real estate equity securities
that have historically been primarily mid cap, but it may also invest in small
cap or large cap equity securities.
4. Investing in Real Estate Securities
The Real Estate Equity Fund invests primarily in companies with
activities related to the real estate industry, such as real estate investment
trusts ("REITs") that own commercial and multifamily residential real estate,
real estate operating companies ("REOCs") that derive the majority of their
revenue, income or asset value from real estate and other companies engaged in
non-real estate businesses but whose real estate holdings are significant in
relation to the market value of their common stock.
The securities purchased will be principally common stock (and
securities convertible into or with rights to purchase common stock) but a
portion of the Fund may be invested in preferred stock. The Fund may also invest
in commercial mortgage securities (debt obligations secured by commercial
property), collateralized mortgage obligations (mortgage pass through securities
secured by commercial mortgage pools) and master limited partnerships from time
to time, but does not do so on the date of this Statement of Additional
Information.
In addition to the Real Estate Equity Fund, all of the other Funds
(except for the Money Market Fund) may have some exposure to real estate risks
through investments in companies engaged in real estate related businesses or
investments in debt instruments secured by real estate.
Risks of real estate securities: Generally speaking, real estate
securities may be affected by risks similar to those resulting from the direct
ownership of real estate, as well as by market risks due to changes in interest
rates and by the overall volatility of the equity markets. The market value of
shares in equity real estate investment trusts and commercial property
companies, in particular, is heavily dependent upon the value of their
underlying properties. Overbuilding, declines in local or regional economic
conditions, financial difficulties on the part of major tenants and increases in
real estate taxes and operating expenses all could decrease the value of the
real estate investments.
5. Investing in Foreign Securities
Investments in foreign securities may be made in a
foreign-denominated security, or in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") or other securities representing
underlying shares of foreign securities. ADRs, EDRs and other securities
representing underlying shares of foreign securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted, but rather in the currency of the market in which they are traded.
ADRs are receipts, typically issued by an American bank or trust company, which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs are receipts issued in Europe by banks or depositories which evidence a
similar ownership arrangement. Generally, ADRs are designed for use in U.S.
securities markets; while EDRs are designed for use in European securities
markets.
Investments in debt securities issued by foreign issuers may be made directly in
foreign-denominated debt instruments or in the form of U.S. dollar denominated
debt securities issued by foreign issuers and publicly traded in the United
States ("Yankees") or in Europe ("Eurobonds").
The International Equity Index, International Equity, International
Opportunities, International Opportunities II, Emerging Markets Equity, Global
Bond and Global Balanced Funds invest primarily in foreign securities, including
foreign-denominated securities. To a lesser extent, the Managed, Aggressive
Balanced High Yield Bond, Core Bond, Large
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Cap Value and Mid Cap Growth Funds may also invest in foreign securities,
including foreign-denominated securities. The Large Cap Growth, Small Cap
Growth, Mid Cap Blend, American Leaders Large Cap Value, Large Cap Value CORE,
Large/Mid Cap Value, Mid Cap Value, Small/Mid Cap Growth, Large Cap Aggressive
Growth, Small/Mid Cap CORE, Small/Mid Cap Value, Real Estate Equity, Growth &
Income, Small Cap Value, and Equity Index Funds may invest in ADRs and other
U.S. dollar denominated foreign securities to a limited extent. The Short-Term
Bond, Bond Index and Active Bond Funds may invest in foreign debt securities
only if denominated in U.S. dollars (i.e., Yankees and Eurobonds).
The Emerging Markets Equity Fund invests primarily in developing countries
commonly known as "emerging markets." To a lesser extent, the Global Balanced,
International Equity Index, International Equity, International Opportunities,
International Opportunities II, Core Bond, Bond Index, Global Bond, Active Bond,
and High Yield Bond Funds may also invest in emerging markets.
Risks of investing in foreign securities are discussed in the
paragraphs that follow:
Currency risks: When a Fund buys foreign-issued securities, it
usually must pay for those securities in the local currency. Therefore, the Fund
must convert funds into the local currency to the extent necessary for this
purpose. Similarly, when a Fund sells a foreign security, it may receive payment
in the local currency. Therefore, if the Fund does not wish to continue to hold
that currency, it must enter into a transaction disposing of it.
In these ways, therefore, a Fund may temporarily hold foreign
currency in order to facilitate the purchase and sale of foreign securities.
This exposes the fund to the risk that the foreign currency's value could, while
the Fund was temporarily holding that currency, decline relative to the U.S.
dollar. This could result in a loss to the Fund, because the Fund's assets and
shares are valued in U.S. dollars. On the other hand, the Fund could experience
gains if the foreign currency's value, relative to the U.S. dollar, increases
during the period when the Fund holds that currency.
More fundamentally, however, because the Fund values its assets and
shares in U.S. dollars, the Fund's gains and/or losses on investments that are
denominated or traded in foreign currencies will depend in part on changes in
the value of that currency relative to the U.S. dollar. This exposes the Fund to
the risk of loss if that foreign currency loses value, as well as the
possibility of gains if that currency gains value, relative to the U.S. dollar.
The Funds may (but are not required to) employ certain strategies to
limit their risks or otherwise manage their exposure to foreign currencies. Such
currency management techniques, as well as the risks that those techniques
themselves present, are discussed in Sections 6. - 10. below.
Also, a risk exists that a foreign country may have or implement
restrictions on transactions in its currency that prevent a Fund from
effectively managing or reducing its exposure to that currency, even after the
Fund has disposed of any securities denominated or traded in that currency.
The risks associated with foreign currency conversions are not
present in investments in Yankees and Eurobonds because these debt securities
are U. S. dollar denominated.
Political and economic risk: Foreign securities often are subject to
heightened political and economic risks, particularly in emerging markets or
other underdeveloped or developing countries, which may have relatively unstable
governments and economies based on only a few industries. Foreign governments
may take over the assets or operations of a company, may impose additional
taxes, or may place limits on the removal of the Fund's assets from that
country. However, investments in foreign securities also offer the opportunity
to diversify holdings and to invest in economies whose growth may outpace that
of the United States.
Regulatory risk: Generally, there is less government supervision of
foreign markets. Foreign issuers generally are not subject to uniform
accounting, auditing, and financial reporting standards and practices applicable
to domestic issuers. There may be less publicly available information about
foreign issuers than domestic issuers. These risks may be greater in emerging
markets or other underdeveloped or developing countries.
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Market risk: Foreign securities markets, particularly those of
emerging markets or other underdeveloped or developing countries, may be less
liquid and more volatile than domestic markets. Certain markets may require
payment for securities a Fund purchases before delivery of these securities to
the Fund, and delays may be encountered in settling securities transactions. In
some foreign markets, there may be limited protection against failures by other
parties to complete their transactions with a Fund. There may be limited legal
recourse against an issuer in the event of a default on a debt instrument held
by a Fund.
Transaction costs: Transaction costs of buying and selling foreign
securities, including brokerage, tax, and custody costs, are generally higher
than those involved in domestic transactions. This is particularly true for
investments in emerging markets, or other underdeveloped or developing
countries.
6. Using Forward Exchange Contracts to Manage Currency Exposure
Transaction hedging and portfolio hedging: When a Fund anticipates
having to purchase or sell a foreign currency to facilitate a foreign securities
transaction, it may wish to "lock in" the current exchange rate for that
currency (vis-a-vis the U.S. dollar) and thus avoid (in whole or in part)
exposure to further changes in that rate that could occur prior to when the
purchase or sale proceeds are actually paid. This is called "transaction
hedging."
A Fund can do transaction hedging by purchasing or selling foreign
currencies in the "spot" (i.e., cash) market. Alternatively, the following Funds
may use "forward" currency foreign exchange purchase or sale contracts for
transaction hedging: the Managed, Aggressive Balanced, Large Cap Value, Mid Cap
Growth, Global Balanced, International Equity Index, International Equity,
International Opportunities, International Opportunities II, Emerging Markets
Equity, Global Bond, Core Bond and High Yield Bond Funds. In a forward exchange
contract, the Fund purchases or sells a specific amount of foreign currency, at
a price set and time set in the contract, which may be any fixed number of days
in the future.
These same Funds may also use forward foreign exchange contracts to
reduce their exposure to changes (relative to the U.S. dollar) in the value of a
foreign currency during a period of time when the Fund owns securities that are
denominated, exposed to or traded in that currency. This is called "portfolio
hedging." Except as described in the paragraph immediately below for certain
funds, the Funds may not engage in portfolio hedging with respect to the
currency of a particular country to an extent greater than the aggregate market
value (at the time of establishing the hedge) of securities held by that Fund
which are denominated, exposed to or traded in that particular foreign currency.
The Funds may or may not attempt to hedge some or all of their foreign portfolio
positions. Rather, they will enter into such transactions only to the extent, if
any, deemed appropriate by their subadvisers. Furthermore, no Fund will use
forward foreign currency exchange contracts for the purpose of leveraging the
Fund's currency exposure.
For purposes of transaction hedging or portfolio hedging, the
Managed, Aggressive Balanced, Mid Cap Growth, Global Balanced, Global Bond, Core
Bond, International Equity Index, International Equity, Emerging Markets Equity,
International Opportunities, and International Opportunities II Funds may use
forward exchange contracts on a "proxy" currency, instead of the currency being
hedged. A proxy currency is one that the subadviser believes will bear a close
relationship to the currency being hedged and believes will approximately equal
the performance of such currency relative to the U.S. dollar. Nevertheless,
changes in the value of the currency being hedged may not correspond to changes
in the value of the proxy currency as expected, which could result in the
currency hedge being more favorable or less favorable to the Fund than the
subadviser had expected.
Other techniques for managing currency exposure: The Managed,
Aggressive Balanced, Mid Cap Growth, Global Balanced, International Equity
Index, International Equity, International Opportunities, International
Opportunities II, Emerging Markets Equity, Core Bond and Global Bond Funds may
use additional techniques when their subadvisers believe that the currency of a
particular country may suffer a significant decline against the U.S. dollar or
against another currency. In that case, these Funds may enter into a forward
currency contract to sell, for a fixed amount of U.S. dollars or other
appropriate currency, the amount of foreign currency approximating the value of
some or all of the Fund's securities denominated in, traded in, or exposed to
such foreign currency. The currency contract may call for the Fund to receive a
currency other than U.S. dollars, for example, if such other currency is
believed to be undervalued or necessary to bring the Fund's overall exposure to
various currencies into a more
11
<PAGE>
desirable balance. For similar purposes, the Managed, Aggressive Balanced,
Global Balanced, Emerging Markets Equity, International Opportunities,
International Opportunities II, International Equity, Mid Cap Growth, Core Bond
and Global Bond Funds may also enter into contracts to purchase, for a fixed
amount of U.S. dollars, or other appropriate currency, an amount of foreign
currency corresponding to the value of some of the Fund's securities.
Asset segregation requirements for forward exchange contracts: A Fund
may "cover" its obligations under outstanding forward currency sale contracts by
maintaining portfolio securities denominated, exposed to or traded in the
currency of such contracts or of an appropriate proxy currency. To the extent a
Fund does not thus cover all of its forward currency sales positions with its
portfolio securities, or if it has outstanding any forward currency purchase
contracts, the Funds' custodian will segregate cash or liquid assets in a
separate account of the Fund in an amount at all times at least equal to the
value of the Fund's net obligation with respect to forward contracts in a
particular currency or, in the case of the Global Balanced Fund only, the value
of that Fund's net "out of the money" obligation (If any) with respect to all of
the Fund's outstanding forward currency contracts. If the value of the portfolio
securities used to cover a position or the value of the assets in the segregated
account declines, the Fund will find additional "cover" or additional cash or
liquid assets will be placed in the account so that the value of the account
will at least equal the required amount described in the preceding sentence.
7. Using Options on Currencies to Manage Currency Exposure
The Managed, Aggressive Balanced, Mid Cap Growth, Global Balanced,
International Equity Index, International Equity, International Opportunities,
International Opportunities II, Emerging Markets Equity, Global Bond, and High
Yield Bond Funds may also purchase and write put and call options on foreign
currencies for the same purposes as those Funds could use forward foreign
exchange contracts (as discussed in Section 6. above). This could include
options traded on U.S. and foreign exchanges, as well as those traded in
"over-the-counter" markets.
The characteristics and risks of these currency option transactions
are similar to those discussed in Sections 15. - 16. below with respect to put
and call options on securities.
Call options on foreign currencies written by a Fund will be
"covered," which means that the Fund will own at all times at least an equal
amount of, or an offsetting position in, the underlying foreign currency.
Asset segregation requirement for currency put options written by a
Fund: With respect to put options on foreign currencies written by a Fund, the
Fund will establish a segregated account with its custodian bank consisting of
cash, U.S. Government securities or other high grade liquid debt securities in
an amount equal at all times to the amount the Fund would be required to deliver
upon exercise of the put.
8. Using Currency Futures Contracts and Options Thereon to Manage
Currency Exposure.
Any Fund may use currency futures contracts and options thereon for
the same purposes and to the same extent as that Fund could use forward foreign
exchange contracts (as discussed in Section 6. above). The characteristics and
risks of such futures and options transactions are similar to those discussed in
Sections 16. - 19. below for other transactions in futures contracts and options
thereon. All transactions in currency futures and options thereon also would be
subject to the applicable limitations in Section 20. below.
9. Using Certain Other Derivative Instruments to Manage Currency
Exposure
As discussed in Section 21. below, several of the Funds may use
currency "swaps," "caps," "floors," and "collars" for the same purposes as those
Funds could use forward foreign exchange contracts (as discussed in Section 6.
above). The characteristics and risks of such "derivative" transactions, as
discussed in Section 21., are generally also applicable when such instruments
are used for currency management purposes.
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10. Using Foreign Currency Exposure Management Strategies (General
Considerations and Risks)
The foreign currency management techniques discussed in Sections
6.- 9. above do not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. The Funds are not
obligated to try to hedge against any change in the value of any currency. Even
if a Fund wished to do so, there is no assurance that market conditions would be
such as to make such hedging possible.
Moreover, even where a Fund establishes positions designed to manage
its foreign currency exposure, there is no assurance that this will be
beneficial to the Fund. Such positions may cause a Fund to forego gains that it
otherwise could have achieved or incur costs and losses that it would not
otherwise have incurred. (In general the cost to the Funds of engaging in
foreign currency management transactions varies with such factors as the
currency involved, the type and duration of the instrument being used for this
purpose, and the market conditions then prevailing.) It is entirely possible,
therefore, that any effort to manage a Fund's currency exposure could have a
negative effect on the Fund's investment performance.
In general, the more foreign securities a given Fund invests in, the
greater its currency management activities are likely to be. Also, the Managed,
Aggressive Balanced, Mid Cap Growth, Global Balanced, International Equity
Index, International Equity, International Opportunities, International
Opportunities II, Emerging Markets Equity and Global Bond Funds may use certain
of these same types of instruments in currency management strategies that expose
those Funds to currencies other than the U.S. dollar. Although this would not be
done for the purpose of "leveraging" the Fund's overall exposure to fluctuations
in currency values, such strategies could expose those Funds to greater risks of
loss and greater volatility than they otherwise would experience.
11. Reallocating a Fund's Assets Among Asset Classes
The continual reallocation of assets among the major asset classes
(e.g., stocks, bonds, and cash) involves the risk that the subadviser may reduce
the Fund's holdings in an asset class whose value increases unexpectedly, or may
increase the Fund's holdings in an asset class just prior to that asset class
experiencing a loss of value. The Managed, Aggressive Balanced, and Global
Balanced Funds tend to exercise broad discretion in reallocating assets across
asset classes. The Global Bond Fund and the International Opportunities II Fund
intend to exercise discretion to reallocate assets across domestic and
international asset classes.
All of the other Funds, with the exception of the Money Market Fund,
generally allow the subadviser some latitude to allocate across asset classes.
Nevertheless, this latitude is expected to be exercised to a lesser degree than
in the case of the Managed, Aggressive Balanced, and Global Balanced Funds.
12. Adopting a Temporary Defensive Strategy
All of the Funds, except the Money Market Fund, may (but are not
required to) adopt a defensive investment posture if the subadviser believes the
investment environment for the Fund is negative. Such a defensive posture would
involve reallocating some or all of a Fund's assets in a manner different from
that contemplated by its primary investment objective and strategies.
Most of the Funds are not limited as to the types of investments they
could use temporarily for defensive purposes. Thus, for example, a small cap
equity Fund might temporarily invest in stocks of larger cap companies or in
high quality, short term debt securities. A bond Fund might shorten maturities
or tighten its investment quality parameters. An international Fund might, for
example, limit the countries it would invest in or temporarily invest only in
high quality, short-term debt securities in the United States.
There can be no assurance that the transaction costs and lost
investment opportunities will not outweigh any benefits to a Fund that attempts
to adopt a defensive strategy.
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13. Investing With an Index-Based Objective
The Equity Index, International Equity Index, and Bond Index Funds
expect to invest substantially all of their assets in equity or debt securities
within their investment objectives and policies at all times. Accordingly, these
Funds may carry more risk in times of declining markets than Funds that are more
likely to adopt a defensive investment posture in such circumstances by
reallocating their assets in a manner different from that contemplated by their
primary investment objective and strategies.
Investments in the Equity Index, International Equity Index, and Bond
Index Funds each involve the risk that the Fund will be unable to match the
performance of its corresponding target index. Each Fund's ability to do so is
affected by (a) the size and timing of cash flows into and out of that Fund, (b)
the level of the Fund's expenses, including commissions and "spreads," on its
portfolio transactions, other portfolio management expenses, and other operating
expenses, and (c) the degree of success of the techniques employed by the Fund's
subadviser. Further, if the size of a Fund limits the number of issues that the
Fund can purchase, or that size is relatively small in relation to cash flows,
there is a greater possibility that the Fund may be unable to match the
performance of the corresponding target index.
The S&P 500 Index: The S&P 500 is an index that is constructed by the
Standard & Poor's Corporation ("Standard & Poor's" or "S&P"), which chooses
stocks on the basis of market values and industry diversification. Most of the
largest 500 companies listed on U.S. stock exchanges are included in the index.
Additional stocks that are not among the 500 largest stocks, by market value,
may be included in the S&P 500 for diversification purposes. The index is
capitalization weighted -- that is, stocks with a larger capitalization (shares
outstanding times current price) have a greater weight in the index. Selection
of a stock for inclusion in the S&P 500 Index in no way implies an opinion by
S&P as to its attractiveness as an investment.
The Trust and the insurance products supported by the Trust are not
sponsored, endorsed, sold or promoted by Standard & Poor's. Standard & Poor's
makes no representation or warranty, express or implied, to the owners of the
insurance products supported by the Trust or to any member of the public
regarding the advisability of investing in the Trust or such insurance products.
Standard & Poor's only relationship to the Trust is the licensing of Standard &
Poor's "marks" and the S&P 500 Index, which is determined, composed and
calculated by Standard & Poor's without regard to the Fund or the Trust.
"Standard & Poor's(R)," "S&P(R) ," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of McGraw-Hill, Inc. and have been licensed for use by the
Trust. In determining, composing, or calculating the S&P 500 Index, S&P has no
obligation to take into consideration the needs of the Trust or those of the
owners of the insurance products supported by the Trust. S&P is not responsible
for and has not participated in the determination of the prices and amount of
the insurance products supported by the Trust or the timing of the issuance or
sale of such products or in the determination or calculation of the equations by
which such products are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing, or trading of such
products.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR
ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS
OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST, OWNERS OF THE PRODUCTS
SUPPORTED BY THE TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
The Lehman Brothers Government/Corporate and Aggregate Bond Indexes:
The Lehman Brothers Government/Corporate Index (the "Government/Corporate
Index") is intended to measure the performance of the domestic, fixed-rate
investment grade debt market. The Government/Corporate Index is composed of (1)
all public obligations of the U.S. Government, its agencies and
instrumentalities (excluding "flower" bonds and pass-through
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issues, such as GNMA certificates) and (2) all publicly issued, fixed-rate, non-
convertible, investment grade, U.S. dollar-denominated, SEC-registered
obligations of domestic corporations, foreign governments and supranational
organizations. Securities in the index generally have at least $150 million par
amount outstanding and at least 1 year remaining to maturity.
The Lehman Brothers Aggregate Bond Index (the "Aggregate Bond Index")
covers the U.S. investment grade fixed-rate bond market, including government
and corporate securities, agency mortgage pass-through securities, and asset-
backed securities. The Aggregate Bond Index covers those securities in the
Government/Corporate Index, plus those covered by the Lehman Mortgage-Backed
Securities Index ("MBS Index") the Lehman Commercial Mortgage-Backed Securities
(ERISA Eligible) Index ("CMBS (ERISA Eligible) Index"), and the Lehman Asset-
Backed Securities Index ("ABS Index"). The MBS Index covers fixed-rate
securities backed by mortgage pools of the Government National Mortgage
Association, the Federal Home Loan Mortgage Association, and the Federal
National Mortgage Association. The CMBS (ERISA Eligible) Index covers ERISA-
Eligible CMBS securities. The ABS Index covers several subsectors -- including
credit and charge cards, auto, utilities and home equity loans -- and includes
pass-through, "bullet," and controlled amortization structures.
All non-government issues in the Government/Corporate Index and the
Aggregate Bond Index are rated at least Baa by Moody's Investors Service, Inc.
("Moody's") or, if unrated by Moody's, BBB by Standard & Poor's Ratings Group
("Standard & Poor's").
All securities in the Government/Corporate Index and the Aggregate
Bond Index issued by non-U.S. entities are denominated in U.S. dollars.
Lehman Brothers, Inc. is neither a sponsor of nor in any other way
affiliated with the Trust or the insurance products supported by the Trust.
Inclusion of a security in the Government/Corporate or Aggregate Bond Indexes in
no way implies an opinion of Lehman Brothers, Inc. as to its attractiveness or
appropriateness as an investment.
The MSCI EAFE GDP Index: The MSCI EAFE GDP Index weights countries
such that a country with a larger GDP will have a greater weight in the index.
Stocks within those countries are capitalization weighted; that is, stocks with
a larger capitalization have a greater weight in the index.
The Trust and the insurance products supported by the Trust are not
sponsored, endorsed, sold or promoted by Morgan Stanley Capital International
("MSCI"). MSCI makes no representation or warranty, express or implied, to the
owners of the Trust, or any member of the public regarding the advisability of
investing in funds generally or in the Trust or any Fund particularly, or the
ability of the MSCI EAFE GDP Index to track general stock market performance.
MSCI is the licensor of certain trademarks, service marks and trade names of
MSCI and of the MSCI EAFE GDP Index, which is determined, composed and
calculated by MSCI without regard to the Trust. "Morgan Stanley Capital
International" is a service mark of Morgan Stanley & Co., Incorporated, that has
been licensed for use by the Trust.
MSCI has no obligation to take the needs of the Trust or the owners
of insurance products supported by the Trust into consideration in determining,
composing or calculating the MSCI EAFE GDP Index. MSCI is not responsible for
and has not participated in the determination of the prices or amounts of
insurance products supported by the Trust or the timing of the issuance and sale
of such products, or in the determination or calculation of the equations by
which such products are convertible into cash. MSCI has no obligation or
liability to owners of the Trust or of the insurance products supported by the
Trust in connection with the administration, marketing or trading of any Fund of
the Trust.
ALTHOUGH MSCI OBTAINS INFORMATION FOR INCLUSION IN OR FOR USE IN THE
CALCULATION OF THE INDEX FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NEITHER
MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE
INDEX OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY OWNERS OF THE
TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA
INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY EXPRESS OR IMPLIED
WARRANTIES, AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
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MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR
ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL MSCI OR ANY OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT,
SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS)
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
14. Investing on a Non-Diversified Basis
The Large Cap Aggressive Growth, Mid Cap Growth and Global Balanced
Funds are "non-diversified Funds." Non-diversified Funds are less restricted in
the extent to which they may invest more than 5% of their assets in any issuer
or purchase more than 10% of the voting securities of any issuer. Because a
relatively high percentage of a non-diversified Fund's assets may be invested in
the obligations of a limited number of issuers, the value of that Fund's shares
may be more volatile and more susceptible to any single economic, political, or
regulatory event, or to credit and market risks associated with a single issuer,
than would the shares of a diversified Fund.
15. Using Options (Generally)
Most of the Funds may, in varying degrees, use options on the
following (which, for simplicity, may be referred to as the "subject" of an
option): currencies, securities, equity indexes, interest rate indexes, and
financial futures contracts. This Section 15. discusses certain characteristics
and risks that are generally common to all of these types of options. The Funds'
use of specific types is discussed in Sections [7. - 8. above and 16. - 20.
below], including characteristics and risks peculiar to those types of options
or the Funds' use of them.
Purchasing "call" options: If a Fund (or anyone else) "purchases" a
"call" option, it pays a purchase price (often called a "premium") plus, in most
cases, a commission to the broker through whom the purchase was made. In return
the Fund (or other purchaser) has the right (but not the obligation), at or
before a specified future time (called the "expiration date"), to acquire a
specified amount of the option's subject (or the economic equivalent thereof) at
a specified price (called the "strike price" or "exercise price"). If the
purchaser of an option decides to exercise this right, we say the option has
been "exercised." If an option is never exercised before its expiration date, it
expires unexercised.
A Fund (or other purchasers of a call option) may profit in one of
two ways. First, the Fund may be able to exercise the call option at a date when
the value of the option's subject exceeds the purchase price of the option
(including any brokerage commission) plus the exercise price. Whether the Fund
will be able to do this depends on how favorable those prices were and how the
value of the option's subject has changed since the option was purchased.
Secondly, a Fund may profit from purchasing an option if the Fund is
able to sell the option (unexercised) at a profit sometime before its expiration
date. (As a practical matter, such a sale would generally be accomplished by
having the Fund sell (e.g., "write") an option identical to the option it owns,
thereby "netting out" the Fund's exposure to the position.) Whether such a
profit will be possible, of course depends on whether the then market price for
the option (less any commission payable on the sale) exceeds the option's
purchase price (including any related commission). In this regard, one of the
general risks of purchasing options is that, for a variety of reasons, the
market price of an option usually does not vary in the same way or to the same
extent as the value of the option's subject varies. Therefore, a Fund can lose
money purchasing a call option, even if the value of the option's subject
increases.
The basic risk in purchasing an option is that, if the Fund never
exercises or sells the option at a profit, the Fund will lose the entire
purchase price of the option (plus any related commissions). That is the maximum
amount the Fund could lose, however.
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Selling or "writing" call options: Selling an option is commonly
referred to as "writing" an option. If the Fund (or anyone else) sells
("writes") a call option, it receives the premium (less any commission) paid by
the option's purchaser and has the obligation to sell the option's subject to
the purchaser at the exercise price if the purchaser exercises the option before
it expires.
The Fund can make a profit writing a call option if the purchaser
fails to exercise the option (which usually would happen only if the value of
the option's subject were below the exercise price). In this case, the option's
purchase price (net of any commissions) would be a profit to the Fund.
Alternatively, a Fund could profit from writing a call option if it
is able to subsequently purchase an identical option that would close out the
Fund's position at a profit. This could be done only if the market price of the
option then exceeded the Fund's initial purchase price by an amount greater than
any commissions payable by the Fund on the purchase or sale transactions. There
is a risk, however, that a Fund may be unable to do this, even if the value of
the call option's subject has declined. This is because, as noted above, the
value of an option does not vary in identical fashion to the value of the
option's subject.
The risk of writing a call option is that, if the value of the
option's subject exceeds the option's exercise price, the option is almost sure
to be exercised. In that case, the Fund will suffer a loss to the extent that
the premium it received for writing the option (net of any commissions), plus
the exercise price it receives are less than the value of the option's subject
at the time of exercise. Therefore, the higher the value of the option's subject
rises, the greater the Fund's potential loss on an option it has written. A Fund
could cut off its further exposure in such a case by purchasing an identical
call option that would close out its position. The Fund would, however, probably
realize a loss on the transaction, because the purchase price it would have to
pay for that call option would probably have increased to reflect the increasing
value of the option's subject.
Writing options on a "covered" basis. One way for a Fund to limit its
risk exposure on call options it has written is to "cover." A call option may be
considered "covered" if, as long as the option is outstanding, the writer
(seller) of the option owns assets that are identical to, or have the same or
similar investment characteristics to, the option's subject. In such a case, if
the value of the option's subject increases, the losses that the Fund will incur
on the call option it has written will tend to be offset by gains that Fund
earns on the assets it is holding to "cover" the option.
Naturally, the more similar the assets held by the fund are to the
option's subject, the more assurance the Fund will have that its losses on call
options it has written will be "covered." How similar those assets must be
varies depending on the Fund and the type of covered option involved. More
details in this regard can be found in Sections 16. - 19. below.
Purchasing and selling (writing) "put" options: A "put" option is the
same as a call option, except that a Fund (or any other person) that purchases a
put option, by paying the purchase price ("premium") has the right to sell
(rather than buy) the option's subject for a stated exercise ("strike") price.
Conversely, the seller (writer) of a put option receives the premium (net of any
commissions) but has the obligation to purchase the option's subject at its
exercise price if the option is exercised.
Thus, if a Fund purchases a put option, its maximum potential loss
would equal the purchase price (plus any commissions thereon). On the other
hand, if a Fund sells (writes) a put option, the Fund could continue to
experience continuing losses while the option is outstanding, to the extent that
the value of the subject of the option continues to decline. If the subject lost
its value entirely, the Fund's maximum loss would equal the exercise price less
the premium (net of any commissions) that the Fund received initially for
writing the option. Because of this risk exposure, a Fund that writes a put
option may seek to "cover" that option with other assets that it owns. More
details about this can be found in Section 16. - 19. below.
Accounting for options: The value of any option that the Fund has
purchased, and the amount of the Fund's obligation under any outstanding option
it has written, will vary as market prices change. These variations are
reflected daily in the Fund's calculation of its net asset value, so that such
value always reflects the estimated impact of current market conditions on all
of the Fund's option positions.
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16. Using Options on Securities in Certain Conservative Investment
Strategies
Except as otherwise noted below, the general discussion of options in
Section 15. above applies to this Section 16.
Each of the Funds may write covered call options that are traded on
national securities exchanges, except for the Growth & Income, Real Estate
Equity, and Money Market Funds. By "covered" we mean that the Fund will actually
own the securities that are the subject of the option.
The same Funds may purchase "protective" put options that are traded
on national securities exchanges. By "protective", we mean that the Fund will
actually own the securities that are the subject of the option. If the market
value of such underlying securities remains above the option's exercise price,
the Fund will, in effect, lose the premium it has paid for the option. The Fund,
however, avoids the risk of loss on the underlying securities, to the extent
that the market value of the underlying securities falls below the exercise
price of the put option.
Liquidity risk: The Funds intend to write and purchase options only
if the subadviser believes that adequate liquidity exists. If for any reason a
Fund cannot, however, close out its open option position when deemed advisable,
the Fund's investment performance could be adversely affected.
17. Using Financial Futures Contracts, Options on Such Contracts and
Options on Stock Indexes (General Considerations)
Most of the Funds may, in varying degrees use financial futures
contracts, options on such futures and options on stock indexes. This Section 17
discusses certain characteristics and risks that generally pertain to these
instruments, regardless of the specific use to which they are put. The Funds'
specific uses are discussed in Sections 7. - 8. above and 18. - 20. below,
including specific risks related to those risks.
Financial futures contracts: Financial futures contracts consist of
interest rate futures contracts, stock index futures contracts, and currency
futures contracts.
An interest rate futures contract is a contract to buy or sell
specified debt securities at a future time for a fixed price. A public market
currently exists for interest rate futures contracts on United States Treasury
Bills, United States Treasury Notes, bank certificates of deposit, and various
other domestic or foreign instruments and indexes.
Stock index futures contracts bind purchaser and seller to delivery
at a future date specified in the contract of a cash amount equal to a multiple
of the difference between the value of a specified stock index on that date and
settlement price specified by the contract. That is, the seller of the futures
contract must pay and the purchaser would receive a multiple of any excess of
the value of the index over the settlement price, and the purchaser must pay and
the seller would receive a multiple of any excess of the settlement price over
the value of the index. A public market currently exists for stock index futures
contracts based on the Standard & Poor's 500 Stock Index, the Standard & Poor's
Midcap Index, the New York Stock Exchange Composite Index, the Value Line Stock
Index, and various other domestic or foreign indexes.
A currency futures contract is a contract to buy or sell a specified
amount of another currency at a future time for a fixed price.
Options on financial futures contracts: The writer of an option on a
financial futures contract agrees to assume a position in such financial futures
contract having a specified price, if the purchaser exercises the option and
thereby assumes the opposite position in the financial futures contract. If the
option purchaser would assume the sale side of the futures contract upon
exercise of the option, the option is commonly called a "put" option. If the
option writer would assume the sale side, it is commonly called a "call" option.
As with other types of options, the party that writes the option receives a
premium for doing so, and the party that purchases an option pays a premium
therefor. However, there is no exercise (or strike) price, as such. Rather, if
the value of the futures contract moves
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against the writer of the option, so that the option is (or is likely to be)
exercised, the option writer, in effect, has the obligation to pay those losses.
More specifically, an option written by a Fund on a financial futures
contract requires the Fund to pay any amount by which the fluctuating price of
the underlying debt instrument or index exceeds (in the case of a call option)
or is less than (in the case of a put option) the price specified in the futures
contract to which the option relates. Therefore, if the price of the debt
instrument or stock index on which the futures contract is based increases (in
the case of a call option written by a Fund) or decreases (in the case of a put
option written by a Fund), the Fund may incur losses that exceed the amount of
the premium received by the Fund for writing the option.
Stock index options: After payment of a specified premium at the time
a stock index option is entered into, the purchaser of a stock index call option
obtains the right to receive a sum of money upon exercise of the option equal to
a multiple of the excess of a specified stock index on the exercise date over
the exercise or "strike" price specified by the option. The purchaser of a put
option obtains the right to receive a sum of money upon exercise of the option
equal to a multiple of any excess of the strike price over the stock index. The
writer of a call or put stock index option receives a premium, but has the
obligation, upon exercise of the option, to pay a multiple of the difference
between the index and the strike price. Thus, if the price of the stock index on
which an index option is based increases (in the case of a call option written
by a Fund) or decreases (in the case of a put option written by a Fund), the
Fund may incur losses that exceed the premium it received for writing the
option.
Stock indexes for which options are currently traded include the
Standard & Poor's 100 and Standard & Poor's 500 Indexes.
Margin requirements for futures and options: When futures contracts
are traded, both buyer and seller are required to post an initial margin of cash
or U.S. Treasury Bills equaling as much as 5 to 10 percent or more of the
contract settlement price. The nature of the margin requirements in futures
transactions differs from traditional margin payments made in securities
transactions in that margins for futures contracts do not involve the borrowing
of funds by the customer to finance the transaction. Instead, a customer's
margin on a futures contract represents a good faith deposit securing the
customer's contractual obligations under the futures contract. If the market
moves against the Trust, so that a Fund has a net loss on its outstanding
futures contracts for a given day, the Fund generally will be required to post
additional margin to that extent. The margin deposit is returned, assuming the
Trust's obligations have been met, when the futures contract is terminated.
Similar margin requirements will apply in connection with any
transactions in which a Fund writes any options. This includes options on
indexes and futures contracts, as well as other types of options.
Certain risks: Financial futures, options thereon, and stock index
options, if used by a Fund, will in most cases be based on securities or stock
indexes the components of which are not identical to the portfolio securities
owned or intended to be acquired by the Fund and in connection with which such
instruments are used. Furthermore, due to supply and demand imbalances and other
market factors, the price movements of financial futures, options thereon, and
stock index options do not necessarily correspond exactly to the price movements
of the securities, currencies, or stock index on which such instruments are
based. These factors increase the difficulty of implementing a successful
strategy using futures and options contracts.
The Funds generally will not take delivery of debt instruments
pursuant to purchasing an interest rate futures contract, nor make a delivery of
debt instruments pursuant to selling an interest rate futures contract. Nor will
the Funds necessarily take delivery of or deliver currencies in connection with
currency futures contracts. Instead, a Fund will more typically close out such
futures positions by entering into closing futures contract transactions.
Similarly, a Fund may wish to close out an option on a futures contract or an
option on an index by entering into an offsetting position in those instruments.
Generally speaking, entering into closing transactions such as
described immediately above would not affect gains and losses of the Fund
resulting from market action prior to such closing transactions. Moreover, there
is a risk that, at the time a Fund wishes to enter into such a closing
transaction, trading in futures or options could be interrupted, for example,
because of supply and demand imbalances arising from a lack of either buyers or
sellers.
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The futures and options exchanges also may suspend trading after the price has
risen or fallen more than the maximum amount specified by the exchange. Exercise
of options could also be restricted or delayed because of regulatory
restrictions or other factors. Although the subadvisers will seek to avoid
situations where these factors would be likely to cause a problem for the Trust,
in some cases they could adversely affect particular Fund transactions in these
instruments.
Asset segregation requirement for certain futures and options
positions: A Fund will maintain at all times in a segregated account with its
custodian cash or high-grade liquid debt securities at least equal to the sum of
the purchase prices of all of the Fund's open futures purchase positions, plus
the current value of the securities underlying all of the Fund's open futures
sales positions that are maintained for purposes other than bona fide hedging,
plus the exercise price of all outstanding put options on futures contracts
written by the Fund, minus the amount of margin deposits with respect thereto as
marked to market each day.
18. Using Financial Futures, Options Thereon, and Stock Index Options for
Certain Hedging-Type Strategies
This Section 18. should be read against the background of the
generally applicable information about options, futures and related risks that
appears in Sections 15. and 17. above.
This Section 18. covers all Funds, except the Growth & Income, Real
Estate Equity, and Money Market Funds. Specifically, with those exceptions, all
Funds may use exchange-traded financial futures contracts thereon, and, except
for the Active Bond Fun, they also may purchase exchange-traded put or call
options on stock indexes, for the purposes discussed below.
It should be emphasized that none of the Funds is required to use any
of these strategies, and doing so is not a principal investment strategy of any
of the Portfolios. Therefore, it should not be assumed that any particular Fund
will ever necessarily use any of these strategies to a significant extent.
Hedging with financial futures contracts against market changes: All
Funds covered by this Section 18. (except the Equity Index Fund) may use
financial futures contracts as a hedge to protect against possible changes in
interest rates and security prices.
Thus, for example, to hedge against the possibility that interest
rates or other factors may result in a general decline in prices of equity
securities of a type owned by them, these Funds (other than the Equity Index
Fund) may sell stock index futures contracts. Similarly, to hedge against the
possibility that increases in interest rates may adversely affect the market
values of debt securities held by them, these Funds (other than the Equity Index
and Large Cap Value CORE Funds) may enter into interest rate futures sale
contracts.
Establishing market exposure and managing cash flow with financial
futures contracts: On the other hand, purchasing futures contracts could enable
a Fund to take the approximate economic equivalent of a substantial position in
bonds or equity securities. Thus, the following Funds may purchase and sell
stock index and interest rate futures to maintain market exposure and manage
cash flows: the Managed, Aggressive Balanced, Equity Index, American Leaders
Large Cap Value, Large Cap Value CORE, Large Cap Growth, Large Cap Aggressive
Growth, Large/Mid Cap Value, Mid Cap Growth, Fundamental Mid Cap Growth, Mid Cap
Blend, Mid Cap Value, Small/Mid Cap CORE, Small/Mid Cap Value, Small/Mid Cap
Growth, Small Cap Growth, Global Balanced, International Equity Index,
International Equity, International Opportunities, International Opportunities
II, Emerging Market Equity, Short-Term Bond, Core Bond, Bond Index, Active Bond,
Global Bond, and High Yield Bond Funds.
Managing foreign currency exposure with foreign currency futures
contracts: Any Fund may use foreign currency futures contracts to the same
extent and in the same manner as it is authorized to use forward foreign
exchange contracts in Section 6. above.
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Using options on futures contracts and options on stock indexes
for the foregoing purposes: Each Fund that this Section 18. authorizes to use
financial futures contracts also may purchase options on appropriate financial
futures contracts and (except for the Active Bond Fund) stock indexes for any
purpose and to the extent that it could use financial futures contracts as
discussed above.
Limitations on "long" positions for certain Funds: The Large Cap
Value CORE Portfolio may not purchase financial futures contracts, except for
currency futures. The following limitation applies to the Managed, Aggressive
Balanced, Equity Index, Large Cap Aggressive Growth, Large/Mid Cap Value
Fundamental Mid Cap Growth and Mid Cap Blend Funds. These Funds may purchase
financial futures contracts, purchase call options on financial futures options
or purchase call options on equity indexes only if (a) they intend to purchase
securities (or, in the case of the Aggressive Balanced, Equity Index, Large Cap
Aggressive Growth, Large/Mid Cap Value, Fundamental Mid Cap Growth, and Mid Cap
Blend Funds, wish to establish or maintain market exposure to securities that
the Fund would be authorized to purchase) and (b) the values of such securities
are expected to change by approximately the same amount as the value of the
futures or options contracts being used to hedge them.
Risks of hedging-type strategies: If, after a Fund establishes a
hedge position, the value of the securities or currencies being hedged moves in
the opposite direction from that anticipated, the Fund as a whole will perform
less well than it would have had it not entered into the futures or option
transaction.
The success of the Funds in using hedging-type techniques depends,
among other things, on the subadviser's ability to predict the direction and
volatility of price movements in the futures or options markets, as well as the
securities markets and, in some cases, currency markets, and on the subadviser's
ability to select the proper type, time and duration of option or futures
contracts. Certain of the subadvisers have limited experience in utilizing these
hedging-type techniques, and there can be no assurance that these techniques
will produce their intended result.
The prices of the futures and options contracts used for hedging-type
strategies may not vary as contemplated in relation to changes in the price of
the securities or currencies being hedged. Accordingly, there is a risk that
transactions in these instruments, if used by a Fund, may not in fact offset the
impact of adverse market developments in the manner or to the extent
contemplated or that such transactions may result in losses to the Fund which
would not be offset by gains with respect to corresponding portfolio securities
owned or to be purchased by that Fund. Hedging-type transactions also may be
more, rather than less, favorable to a Fund than originally anticipated.
19. Using Options and Futures In Potentially More Aggressive Strategies
This Section 19. should be read against the background of the
generally applicable information about options, futures, and related risks that
appears in Section 15., 17. and 18. above.
This Section 19. applies only to the Managed, Aggressive Balanced,
Large Cap Value CORE, Mid Cap Growth, Small/Mid Cap CORE, Small/Mid Cap Growth,
Small Cap Growth, Global Balanced, International Equity Index, International
Equity, International Opportunities II, Emerging Markets Equity, Short-Term
Bond, Bond Index, Global Bond, and High Yield Bond Funds. The option and futures
strategies discussed in this Section are in addition to those discussed for
those (and other) Funds in Sections 7., 8., 16., and 18. above.
Writing certain types of options: The Managed, Aggressive Balanced,
Large Cap Value CORE, Mid Cap Growth, Small/Mid Cap CORE, , Small/Mid Cap
Growth, Small Cap Growth, Global Balanced, International Equity Index,
International Equity, International Opportunities II, Emerging Markets Equity,
Short-Term Bond, Bond Index, Global Bond, and High Yield Bond Funds may write
"covered" put options on securities. In addition, the Managed, Aggressive
Balanced, Large Cap Value CORE, Mid Cap Growth, Small/Mid Cap CORE, Small/Mid
Cap Growth, Small Cap Growth, Global Balanced, International Equity Index,
International Equity, International Opportunities II, Short-Term Bond, Bond
Index, Global Bond, and High Yield Bond Funds may also write covered put and
call options on indexes composed of securities in which the Fund may invest.
Such index options may be written in any manner that the Fund in question is
authorized to write options on specific securities it owns.
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A put option written by a Fund will be deemed to be "covered" if
the Fund maintains in a segregated account with its custodian cash, U.S.
Government securities or other high-grade liquid debt securities with a value at
all times at least equal to the exercise price of the put. Put and call options
written by Funds will also be considered to be "covered" to the extent that the
Fund's liabilities under these options are fully offset by its rights under put
or call options purchased by the Fund.
Purchasing certain types of options. The Managed, Aggressive
Balanced, Large Cap Value CORE, Mid Cap Growth, Small/Mid Cap CORE, Small Cap
Growth, Global Balanced, International Equity Index, International Equity,
International Opportunities II, Emerging Markets Equity, Global Bond, and High
Yield Bond Funds may purchase put and call options on securities in which it may
invest, without specific restriction as to the circumstances of such purchases.
Similarly, each of these Funds, as well as the Small/Mid Cap Growth and Short-
Term Bond Funds, may purchase put and call options on indexes composed of
securities in which the Fund may invest, without specific restriction on the
circumstances of such purchases.
Option purchases of the type covered in the preceding paragraph would
have to be consistent with the Fund's investment objective. Also, each of the
above-listed Funds is subject to the limitation on certain futures and options
transactions described in Section 20.
Using options traded over-the-counter or on foreign exchanges: The
Managed, Aggressive Balanced, Large Cap Value CORE, Mid Cap Growth, Small/Mid
Cap CORE, Small/Mid Cap Growth, Small Cap Growth, Global Balanced, International
Equity Index, International Equity, International Opportunities II, Emerging
Markets Equity, Short-Term Bond, Bond Index, Global Bond, and High Yield Bond
Funds may also use options on securities and options on indexes that are traded
"over-the-counter" or on foreign exchanges, in any manner that they would be
permitted to use such options that were traded on domestic exchanges. These
Funds will engage in over-the-counter options only with member banks of the
Federal Reserve System and primary dealers in U.S. Government securities. These
Funds will treat over-the-counter options they have purchased and assets used to
cover over-the-counter options they have written as illiquid securities.
However, with respect to options written with primary dealers in U.S. Government
securities pursuant to an agreement requiring a closing purchase transaction at
a formula price, the amount of illiquid securities may be calculated with
reference to the formula price.
Using futures contracts and options on futures contracts for certain
purposes: The Managed, Aggressive Balanced, American Leaders Large Cap Value,
Large Cap Value CORE, Mid Cap Growth, Small/Mid Cap CORE, Small/Mid Cap Value,
Small/Mid Cap Growth, Small Cap Growth, Global Balanced, International Equity
Index, International Equity, International Opportunities II, Emerging Markets
Equity, Short-Term Bond, Bond Index, Active Bond, Core Bond, Global Bond, and
High Yield Bond Funds may use futures contracts on securities or on market
indexes, and options on such futures contracts, without specific restriction on
the purposes of such transactions. Nevertheless, such transactions would have to
be consistent with the Fund's investment objective.
There is no specific overall limit on the amount of the assets these
Funds may devote to financial futures contracts and options thereon, even if
such contracts are not limited to hedging-type transactions. Nevertheless
(except through the purchase of options, as discussed below) the Funds will not
use these techniques for purpose of "leveraging" the Fund's exposure to the
securities underlying any futures contract or option thereon or its exposure to
foreign currencies. Although this limitation does not apply to options on
futures contracts that are purchased by a Fund, the total amount of premiums
paid by a Fund for such options that are not used for bona fide hedging is
(pursuant to the restrictions set forth in Section 20. below) limited to 5% of
the Fund's net assets.
Risks of potentially more aggressive options and futures strategies:
As outlined above, the Funds discussed in this Section 19. may engage in types
of options and futures transactions not permitted to the other Funds, including
over-the-counter options, writing covered put options, and more types of
transactions that are not solely for hedging-type purposes or that other may be
more speculative. Also, even as to options and futures transactions of a type
that are permitted to other Funds, these Funds are, in certain cases, not as
limited regarding the amount of their assets that may be so employed.
Accordingly, to the extent that these Funds exercise their broader authority to
enter into options and futures transactions, they may incur greater risks than
the other Funds.
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20. Limiting the Funds' Exposure to Certain Futures and Option
Transactions.
The Equity Index, Large Cap Value, Large Cap Growth, Mid Cap Value,
Small Cap Value, and International Opportunities Funds will not enter into any
financial futures contract or purchase any option thereon, if, immediately
thereafter, the total amount of its assets required by commodities exchanges to
be on deposit as margin to secure its obligations under futures contracts, plus
the amount of premiums paid by the Fund for outstanding options to purchase
futures contracts, exceeds 5% of the market value of the Fund's total assets.
The following limitation applies to all of the Funds that can invest
in financial futures contracts or options thereon, other than the Equity Index,
Large Cap Value, Large Cap Growth, Mid Cap Value, Small Cap Value and
International Opportunities Funds: No such other Fund may purchase, sell or
write futures contracts or options thereon other than for "bonafide" hedging
purposes (as defined by the U.S. Commodity Futures Trading Commission) if
immediately thereafter the Fund's initial margin deposits on such outstanding
non-hedging futures and options positions, plus the amount of premiums paid by
the Fund for such outstanding non-hedging options on futures contracts, exceeds
5% of the market value of the Fund's net assets. For the purpose of this
calculation, any amount by which an option is "in the money" at the time of its
purchase is excluded from the premium paid therefor.
Nor will any of the Large Cap Value, Large Cap Value CORE, Large Cap
Growth, Mid Cap Value, Small Cap Value or International Equity Funds enter into
any transaction in interest rate, stock index or currency futures, or options
thereon, or stock index options, if the value of the securities being hedged by
all of such instruments would immediately thereafter be more than one-third of
the value of the Fund's total assets. Nor will any Fund consider as "hedging"
any transaction that is intended to leverage the Fund's investment exposure to
the type of security being hedged or to leverage the Fund's currency exposure.
21. Using Other Types of Derivative Instruments
The Global Balanced, International Equity Index, and High Yield Bond
Funds may engage in "swap" transactions (specifically interest rate, currency
and index swaps) and in the purchase or sale of related "caps," "floors," or
"collars." The Emerging Markets Equity Fund may also engage in those
transactions and, in addition, may engage in equity swap transactions. The
Managed and Aggressive Balanced Funds may each invest up to 10% of the
respective Fund's total assets (at the time the swap is entered into) in
currency and equity swaps for hedging purposes or for currency management
strategies as discussed in Section 6 above. The International Equity Fund may
invest up to 10% of its total assets (at the time the swap is entered into) in
currency and equity swaps, although it will use currency swaps only for hedging
purposes. The Global Bond Fund may also use these derivative instruments, but
only for currency management strategies as discussed in Section 6. above.
The nature and risks of these types of transactions are discussed
further in the paragraphs that follow.
Interest rate swaps: In a typical interest rate swap agreement, one
party agrees to make payments equal to a floating interest rate on a specified
amount (the "notional amount") in return for payments equal to a fixed interest
rate on the same amount for a specified period. If a swap agreement provides for
payments in different currencies, the parties might agree to exchange the
notional amount as well.
Provided the contract so permits, a Fund will usually enter into
swaps on a "net" basis: that is, the two payment streams are netted out in a
cash settlement on the payment date or dates specified in the instrument, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments.
Interest rate caps, floors and collars: The purchaser of an interest
rate cap or floor, upon payment of a fee, has the right to receive payments (and
the seller of the cap is obligated to make payments) to the extent a specified
interest rate exceeds (in the case of a cap) or is less than (in the case of a
floor) a specified level over a specified period of time or at specified dates.
The purchaser of an interest rate collar, upon payment of a fee, has the right
to receive payments (and the seller of the collar is obligated to make payments)
to the extent that a specified interest rate falls outside an agreed upon range
over a specified period of time or at specified dates.
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Currency, index and equity swaps, caps, floors and collars:
Currency, index, and equity swaps, caps, floors, and collars are similar to
those for interest rates described in the two preceding paragraphs above, except
that, rather than being determined by variations in specified interest rates,
the obligations of the parties are determined by variations in a specified
currency, interest rate index, or equity index, as the case may be.
Risks and purposes of these other derivatives: The amount of a Fund's
potential gain or loss on any swap transaction is not subject to any fixed
limit. Nor is there any fixed limit on the Fund's potential loss if it sells a
cap, floor or collar. If a Fund buys a cap, floor or collar, however, the Fund's
potential loss is limited to the amount of the fee that it has paid.
Swaps, caps, floors and collars tend to be more volatile than many
other types of investments. Nevertheless, a Fund will use these techniques only
as a risk management tool and not for purposes of leveraging the Fund's market
exposure or its exposure to changing interest rates, security values or currency
values. Rather, a Fund will use these transactions only to preserve a return or
spread on a particular investment or portion of its investments, to protect
against currency fluctuations, as a duration management technique, to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date, or to gain exposure to certain markets in the most economical
way possible. Nor will a Fund sell interest rate caps, floors or collars if it
does not own securities providing the interest that the Fund may be required to
pay under such derivative instruments. Finally, of course, a Fund may use these
derivative instruments only in ways that are consistent with its investment
objective.
The use of swaps, caps, floors and collars involves investment
techniques and risks different from those associated with other portfolio
security transactions. If the subadviser is incorrect in its forecasts of market
values, interest rates, currency rates and other applicable factors, the
investment performance of a Fund will be less favorable than if these techniques
had not been used.
These instruments are typically not traded on exchanges. Accordingly,
there is a heightened risk that the other party to certain of these instruments
will not perform its obligations to the Fund. None of the Funds will enter into
any swap, cap, floor, or collar, unless the other party to the transaction is
deemed creditworthy by the subadviser.
There also is a risk that a Fund may be unable to enter into
offsetting positions to terminate its exposure or liquidate its investment under
certain of these instruments when it wishes to do so. Such occurrences could
result in losses to the Fund. In recent years, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.
The liquidity of swaps, caps, floors and collars will be determined
by the subadviser based on various factors, including (1) the frequency of
trades and quotations, (2) the number of dealers and prospective purchasers in
the marketplace, (3) dealer undertakings to make a market, (4) the nature of the
instrument (including any demand or tender features) and (5) the nature of the
marketplace for trades (including the ability to assign or offset a Fund's
rights and obligations relating to the investment). Such determinations will
govern whether the instrument will be deemed within the Fund's 15% restriction
on investments in securities that are not readily marketable.
Segregation requirements for these derivatives: Each Fund will
maintain cash or liquid high grade debt securities in a segregated account with
its custodian in an amount sufficient at all times to cover its current
obligations under swaps, caps, floors and collars. If a Fund enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If a Fund enters into a swap agreement on other than a net basis, or
sells a cap, floor or collar, it will segregate assets with a daily value at
least equal to the full amount of the Fund's accrued obligations under the
agreement.
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22. Investing in Other Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other
investment companies investing exclusively in securities in which that Fund may
otherwise invest. As a shareholder in an investment company, a Fund would bear
its ratable share of that investment company's expenses, including advisory and
administration fees, except as specifically stated otherwise in the paragraphs
that follow.
Using other investment companies to gain exposure to certain foreign
securities: Because of restrictions on direct investment by U.S. entities in
certain countries, other investment companies may provide the most practical (or
only way) for a Fund to invest in certain markets. Such investments may involve
the payment of substantial premiums above the net asset value of those
investment companies' portfolio securities and are subject to limitations under
the Investment Company Act of 1940. A Fund also may incur tax liability to the
extent it invests in the stock of a foreign issuer that is a "passive foreign
investment company," regardless of whether such "passive foreign investment
company" makes distributions to the Fund.
The Emerging Markets Equity Fund is the most likely to make
significant investments in other investment companies to gain exposure to
foreign securities; and John Hancock and the subadviser have agreed to waive
their own management fees with respect to the portion of that Fund's assets
invested in other open-end (but not closed-end) investment companies. (An "open
end" company is one whose shares are freely redeemable. A "closed end" company
is one whose shares can generally be disposed of only in market transactions, as
opposed to redemptions.)
The International Equity Index Fund is likely to invest in closed-end
investment companies known as "country funds" or passive foreign investment
companies. The International Equity Fund may also purchase shares of investment
companies investing primarily in foreign securities, including country funds.
The Large Cap Value CORE and International Equity Funds may invest in
World Equity Benchmark Shares ("WEBS") and other investment company securities
that represent a similar interest in securities included in a foreign securities
index. (These securities are similar in structure to the SPDR's discussed
below.)
Investing in Standard & Poor's Depository Receipts (SPDR's): The
Equity Index, American Leaders Large Cap Value, Large Cap Value CORE, and
Small/Mid Cap CORE Funds may, consistent with their investment objectives,
purchase Standard & Poor's Depository Receipts ("SPDRs"). SPDRs are American
Stock Exchange-traded securities that represent ownership in the SPDR Trust, a
trust which has been established to accumulate and hold a portfolio of common
stocks that is intended to track the price performance and dividend yield of the
S&P 500. This trust is a regulated investment company that is sponsored by a
subsidiary of the American Stock Exchange. SPDRs may be used for several
reasons, including but not limited to: facilitating the handling of cash flows
or trading, or reducing transaction costs.
Investing in money market fund shares: A Fund may also invest in
money market funds managed by its subadviser in reliance upon an exemptive order
received by its subadviser from the SEC. Such exemptive orders may permit funds
managed by the subadviser to invest in money market funds managed by it, to an
extent in excess of amounts otherwise permitted by the Investment Company Act.
The subadviser to the Mid Cap Growth Fund will remit the fees it receives from
money market funds it manages, to the extent such fees are based on the Mid Cap
Growth Fund's assets, to the Mid Cap Growth Fund. Nor are the Large Cap Value
and International Opportunities Funds charged any investment management fees for
investments in money market funds managed by their subadvisers.
23. Purchasing "When Issued" Securities and Forward Commitments
All Funds (other than the Growth & Income and Money Market Funds) may
purchase securities on a when issued or delayed delivery basis. When such
transactions are negotiated, the price of such securities is fixed at the time
of commitment, but delivery and payment for the securities may take place a
month or more after the date of the commitment to purchase. The securities so
purchased are subject to market fluctuations, and no interest accrues to the
purchaser during this period.
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In addition, these Funds may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ("forward
commitments"), because new issues of securities are typically offered to
investors on that basis. Forward commitments involve a risk of loss if the value
of the security to be purchased declines prior to the settlement date. This risk
is in addition to the risk of decline in value of the Fund's other assets.
Although a Fund will enter into such contracts with the intention of acquiring
the securities, the Fund may dispose of a commitment prior to settlement if its
subadviser deems it appropriate to do so.
Asset segregation requirement for these transactions. Each Fund will
maintain in a segregated account with its custodian cash or liquid high grade
debt securities that at all times equal the amount of its when issued and
forward commitments.
24. Short-Term Trading
All Funds can use short-term trading of securities as a means of
managing their portfolios to achieve their investment objectives. As used
herein, "short-term trading" means the purchase and subsequent sale of a
security after it has been held for a relatively brief period of time, in some
instances for less than three months. A Fund may engage in short-term trading to
the extent that the subadviser believes the transactions, net of costs
(including commissions, if any), will benefit the Fund. Generally speaking,
short-term trading can be expected to generate expenses for a Fund that would
not be incurred by a Fund that did not engage in that practice.
25. Entering Into Repurchase Agreements
All of the Funds may enter into repurchase agreements.
A repurchase agreement is a contract under which a Fund would acquire
a security for a relatively short period (e.g., 7 days), subject to the seller's
obligation to repurchase the security at a fixed time and price (representing
the Fund's cost plus interest). Repurchase agreements will be entered into only
with member banks of the Federal Reserve System and with "primary dealers" in
U.S. Government securities.
The Managed, Aggressive Balanced, Growth & Income, Large Cap Growth,
Real Estate Equity, Active Bond and Money Market Funds may not invest in
repurchase agreements maturing in more than 7 days. No other Fund will invest in
repurchase agreements maturing in more than 7 days if that investment, together
with any other investments deemed "illiquid," would exceed 15% of the Fund's net
assets.
Each Fund has a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian or sub-custodian, either physically or in book-entry form, and that
the collateral must be marked-to-market daily to ensure that each repurchase
agreement is fully "collateralized" at all times. In the event of a bankruptcy
or other default by a seller of a repurchase agreement, however, the Fund could
experience delays in liquidating the underlying securities and could experience
losses (including the possible decline in the value of the underlying securities
during the period while the Fund seeks to enforce its rights thereto, possible
subnormal levels of income and lack of access to income during this period, and
expenses of enforcing its rights).
26. Participating in Joint Trading Accounts
John Hancock has established a "joint trading account" that all
Funds, in the discretion of their subadvisers, can use to invest relatively
small amounts of cash on a more favorable basis than they could do individually.
John Hancock is responsible for investing the aggregate cash balances in the
joint trading account into one or more repurchase agreements, as described in
Section 25. above, or in other money market instruments. The joint trading
account was established pursuant to an order of the SEC and the following Funds
regularly participate in it: the Managed, Aggressive Balanced, Growth & Income,
Large Cap Growth, Large/Mid Cap Value, Small/Mid Cap Growth, Real Estate Equity,
Small Cap Value, International Equity Index, High Yield Bond and Money Market
Funds.
Each Fund is also free to participate in any similar joint trading
account that their subadviser operates for mutual fund assets managed by it.
These other joint trading accounts would be operated pursuant to their own SEC
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exemptive orders, and the following Funds currently participate in such other
joint trading accounts: the Large Cap Value CORE, Mid Cap Growth, Small/Mid Cap
CORE, Small/Mid Cap Growth, Small Cap Growth, International Equity, and Active
Bond Funds.
In each case, the subadviser that operates one of these joint trading
accounts is responsible for ensuring that all repurchase agreements acquired
through these accounts are at all times fully collateralized.
27. Lending of Fund Securities
In order to generate additional income, all Funds may, and most do,
lend securities from their portfolios to brokers, dealers and financial
institutions such as banks and trust companies. Such loans will be secured by
collateral consisting of cash or U.S. Government securities, which will be
maintained in an amount equal to at least 100% of the current market value of
the loaned securities. During the period of the loan, the Fund receives the
income (if any) on the loaned securities, as well as additional compensation for
making the loan. Cash collateral may be invested in short-term securities, which
will increase the current income of the Fund. Such loans will not be for more
than 60 days and will be terminable by the Fund at any time. The Fund will have
the right to regain record ownership of loaned securities in order to exercise
rights of a holder thereof including receiving interest or other distributions
or exercising voting rights. The Fund may pay reasonable fees to persons
unaffiliated with the Fund for services in arranging such loans.
Lending of portfolio securities involves a risk of failure by the
borrower to return the loaned securities, in which event the Fund may incur a
loss. However, most of the Funds' loans of securities are pursuant to an
arrangement with State Street Bank & Trust Company, the Trust's primary
custodian. Under these arrangements, State Street Bank & Trust Company
guarantees the Trust against any loss or damages that any Fund incurs as a
result of the borrower failing to return the Fund's securities in accordance
with the terms of the loan. No Fund will lend portfolio securities having a
total value in excess of 33 1/3% of its total assets.
28. Using Reverse Repurchase Agreements and Mortgage "Dollar Rolls"
The Short-Term Bond and Money Market Funds may enter into reverse
repurchase agreements to facilitate portfolio liquidity, a practice common in
the mutual fund industry, or for arbitrage transactions (discussed below). In a
reverse repurchase agreement, the Fund sells a security and enters into an
agreement to repurchase the security at a specified future date, but at a lower
price. The Fund generally retains the right to interest and principal payments
on the security, as well as use of the proceeds while the repurchase agreement
is outstanding.
The Managed, Aggressive Balanced, Short-Term Bond, Bond Index, Core
Bond, Active Bond, and Global Bond Funds may enter into mortgage dollar rolls,
in which the Fund sells mortgage-backed securities for delivery in the current
month and simultaneously contracts to purchase substantially similar securities
at a specified future date and price. While the Fund foregoes principal and
interest paid on the mortgage-backed securities during the "roll" period, the
Fund is compensated by the difference between the current sale price and the
lower price for the future purchase as well as by any return earned on the
proceeds of the initial sale.
The mortgage dollar rolls and reverse repurchase agreements entered
into by a Fund may be used as arbitrage transactions in which the Fund will
maintain an offsetting position in investment-grade debt obligations or
repurchase agreements that mature on or before the settlement date of the
related mortgage dollar roll or reverse repurchase agreement. Since the Fund
will receive interest on the securities or repurchase agreements in which it
invests the transaction proceeds, such transactions could be considered to
involve leverage. However, since such securities or repurchase agreements will
be high quality and will mature on or before the settlement date of the mortgage
dollar roll or reverse repurchase agreement, the Trust does not believe that
such arbitrage transactions present the risks to the Fund that are associated
with other types of leverage.
Asset segregation requirements for reverse repurchase agreements and
mortgage dollar rolls: Each Fund will set aside in a segregated account with its
custodian liquid assets that at all times are at least equal to its obligations
under outstanding reverse repurchase agreements and mortgage dollar rolls it has
entered into.
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29. Investing in Rule 144A and Illiquid Securities
All Funds, other than the Growth & Income, Large Cap Growth and Real
Estate Equity Funds, may purchase unregistered securities that are eligible for
resale to "qualified institutional buyers" pursuant to Rule 144A under the
Securities Act of 1933. Case-by-case determinations are made whether each issue
of Rule 144A securities owned by the Fund is an illiquid security.
If illiquid, a Rule 144A security may not be purchased by the Money
Market Fund. Nor may the Money Market Fund purchase any other investments that
are deemed to be illiquid, if the total of all its illiquid assets would be more
than 10% of its net assets. Each Fund other than the Money Market Fund, however,
may purchase illiquid Rule 144A securities, or other illiquid assets if, and
only if, the total of all the Fund's illiquid assets would not thereby be made
to exceed 15% of the Fund's net assets.
THE FUNDS' FUNDAMENTAL INVESTMENT RESTRICTIONS
The Funds' investment objectives and strategies may, in general, be
changed without the approval of shareholders.
In a few cases, however, the Investment Company Act requires such approval. In
addition, the Trust has adopted as "fundamental" the below-listed restrictions
relating to the investment of each Fund's assets. That these restrictions are
"fundamental" policies means that they may not be changed for any Fund without
the approval of a majority of the outstanding voting shares of each affected
Fund. (The term "majority of the outstanding voting shares" means the lesser of
(1) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (2) more than 50% of the outstanding
shares.)
To the extent the Trust's prospectus or this Statement of Additional
Information anywhere sets forth investment restrictions more restrictive than
the fundamental restrictions described below, the more restrictive limitation
controls; but any such more restrictive limitation may be changed without any
shareholder approval, subject to the below fundamental restrictions.
As a matter of fundamental policy, no Fund will:
(1) Purchase real estate or any interest therein, except through the
purchase of corporate or certain government securities (including securities
secured by a mortgage or a leasehold interest or other interest in real estate).
A security issued by a real estate or mortgage investment trust or an interest
in a pool of real estate mortgage loans is not treated as an interest in real
estate. Investments of the type permitted in the Real Estate Equity Fund are not
deemed interests in real estate for the purposes of this restriction.
(2) Make loans, other than through the acquisition of obligations in
which the Fund may invest consistent with its objective and investment policies,
except that each Fund may lend portfolio securities not having a value in excess
of 33 1/3% of the Fund's total assets.
(3) Invest in commodities or in commodity contracts or in puts, calls
or a combination of both, except that
(A) the Managed, Aggressive Balanced, Equity Index, Large Cap
Value, American Leaders Large Cap Value, Large Cap Growth, Large Cap
Value CORE, Large Cap Aggressive Growth, Large/Mid Cap Value, Mid Cap
Value, Mid Cap Growth, Fundamental Mid Cap Growth, Mid Cap Blend,
Small/Mid Cap Value, Small/Mid Cap Growth, Small/Mid Cap CORE, Small
Cap Value, Small Cap Growth, Global Balanced, International Equity
Index, International Equity, International Opportunities,
International Opportunities II, Emerging Markets Equity, Short-Term
Bond, Core Bond, Bond Index, Global Bond, and High Yield Bond Funds
may
28
<PAGE>
(i) write call options on, and purchase put
options covered by, securities held by them and purchase
and sell options to close out positions thus established,
provided that no such covered call or put option position
will be established in the Large Cap Growth Fund if more
than one-third of the Fund's total assets would immediately
thereafter be subject to such call and put options,
(ii) purchase options on stock indexes and write
such options to close out positions previously established,
and
(iii) enter into financial futures contracts or
purchase options on such contracts, and effect offsetting
transactions to close out such positions previously
established; provided that, (a) as to the Large Cap Value,
Large Cap Growth, Mid Cap Value, and Small Cap Value Funds,
no position in financial futures, options thereon or
options on securities indexes will be established if,
immediately thereafter, the then-current aggregate value of
all securities owned or to be acquired by the Fund which
are hedged by such instruments exceeds one-third of the
value of its total assets and (b) as to such Funds, and as
to the Equity Index and International Opportunities Funds,
no futures position or position in options on futures will
be established if, immediately thereafter, the total of the
initial margin deposits required by commodities exchanges
with respect to all open futures positions at the time such
positions were established, plus the sum of the premiums
paid for all unexpired options on futures contracts would
exceed 5% of the Fund's total assets;
(B) with respect to the Managed, Aggressive Balanced,
Equity Index, Large Cap Value, American Leaders Large Cap Value,
Large Cap Value CORE, Large Cap Aggressive Growth, Large/Mid Cap
Value, Mid Cap Value, Mid Cap Growth, Fundamental Mid Cap Growth, Mid
Cap Blend, Small/Mid Cap Value, Small/Mid Cap Growth, Small/Mid Cap
CORE, Small Cap Value, Small Cap Growth, Global Balanced,
International Equity Index, International Equity, International
Opportunities, International Opportunities II, Emerging Markets
Equity, Short-Term Bond, Bond Index, Active Bond, Core Bond, Global
Bond, and High Yield Bond Funds, forward foreign exchange contracts,
forward commitments, and when issued securities are not deemed to be
commodities or commodity contracts or puts or calls for the purposes
of this restriction;
(C) the Managed, Aggressive Balanced, Mid Cap Growth,
American Leaders Large Cap Value, Large Cap Value CORE, Large Cap
Aggressive Growth, Large/Mid Cap Value, Small/Mid Cap Growth,
Small/Mid Cap CORE, Small Cap Growth, Global Balanced, International
Equity Index, International Equity, International Opportunities II,
Emerging Markets Equity, Short-Term Bond, Bond Index, Global Bond,
and High Yield Bond Funds may, in addition to the activities
permitted in (A) and (B) above,
(i) write put and call options on securities and
market indexes, if such positions are covered by other
securities or outstanding put and call positions of the
Fund, and purchase put and call options to close out any
positions thus established, and
(ii) enter into futures contracts on securities
or market indexes, or purchase or write put or call options
on such futures contracts, for hedging or speculative
(non-hedging) purposes, and enter into offsetting
transactions to close out any positions thus established;
provided that none of these Funds may purchase, sell or
write such futures or options other than for bona fide
hedging purposes if immediately thereafter the Fund's
margin deposits on such non-hedging positions, plus the
amount of premiums paid for outstanding options on futures
contracts that are not for bona fide hedging purposes (less
any amount by which any such option is "in the money" at
the time of purchase) exceeds 5% of the market value of the
Fund's net assets;
(D) the Active Bond and Core Bond Funds may enter into
futures contracts and purchase or write options thereon to the same
extent as is permitted in (C), above, with respect to the Funds
listed therein; and
29
<PAGE>
(E) the Managed, Aggressive Balanced, Equity Index, Large
Cap Value, American Leaders Large Cap Value, Large Cap Value CORE,
Large Cap Aggressive Growth, Large/Mid Cap Value, Mid Cap Value, Mid
Cap Growth, Fundamental Growth, Mid Cap Blend, Small/Mid Cap Value,
Small/Mid Cap CORE, Small Cap Value, Small Cap Growth,
Global Balanced, International Equity Index, International Equity,
International Opportunities, International Opportunities II, Emerging
Markets Equity, Core Bond, Global Bond, and High Yield Bond Funds may
purchase or write put or call options on foreign currencies, may
purchase put or call options on securities, and may enter into
closing transactions with respect to any of such options.
(4) Engage in the underwriting of securities of other issuers, except
to the extent the Fund may be deemed an underwriter in selling as part of an
offering registered under the Securities Act of 1933 securities which it has
acquired.
(5) Borrow money, except from banks as a temporary measure where such
borrowings would not exceed 5% of the market value of total assets of the Fund
as of the time each such borrowing is made, or 10% as to the Aggressive
Balanced, American Leaders Large Cap Value, Large Cap Value CORE, Large Cap
Aggressive Growth, Large/Mid Cap Value, Fundamental Growth, Mid Cap Blend,
Small/Mid Cap Value, Small/Mid Cap CORE, International Equity
Index, International Equity, International Opportunities II, Emerging Markets
Equity, Bond Index, Core Bond and High Yield Bond Funds, subject to a non-
fundamental policy that none of these Funds will make additional investments at
any time when such borrowings plus any amounts payable by the Fund under reverse
repurchase agreements exceed 5% of that Fund's total assets.
(6) Except as set forth in the following sentence, neither the
Managed and Active Bond Funds, nor the Growth & Income, Large Cap Growth, Real
Estate Equity, or Money Market Funds may purchase securities which are subject
to legal or contractual delays in or restrictions on resale. The Managed and
Active Bond Funds may, however, purchase restricted securities, including those
eligible for resale to "qualified institutional buyers" pursuant to Rule 144A
under the Securities Act of 1933, subject to a non fundamental restriction
limiting all illiquid securities held by each Fund to not more than 15% of the
Trust's net assets.
(7) Purchase securities on margin, except for short-term credits as
may be necessary for the clearance of purchases or sales of securities, or
effect a short sale of any security. Neither the use of futures contracts as
permitted by restriction (3), above nor the use of option contracts as permitted
by restriction (3) above, shall be deemed to be the purchase of a security on
margin.
(8) Invest for the purpose of exercising control over or management
of any company.
(9) Unless received as a dividend or as a result of an offer of
exchange approved by the Securities and Exchange Commission ("SEC") or of a plan
of reorganization, purchase or otherwise acquire any security issued by an
investment company if the Fund would immediately thereafter own (a) more than 3%
of the outstanding voting stock of the investment company, (b) securities of the
investment company having an aggregate value in excess of 5% of the Fund's total
assets, (c) securities of investment companies having an aggregate value in
excess of 10% of the Fund's total assets, or (d) together with investment
companies having the same investment adviser as the Fund (and companies
controlled by such investment companies), more than 10% of the outstanding
voting stock of any registered closed-end investment company. A real estate or
mortgage investment trust is not considered an investment company. This
restriction (9) does not apply to the Aggressive Balanced, Equity Index, Large
Cap Value, American Leaders Large Cap Value, Large Cap Value CORE, Large Cap
Aggressive Growth, Large/Mid Cap Value, Mid Cap Value, Mid Cap Growth,
Fundamental Growth, Mid Cap Blend, Small/Mid Cap Value, Small/Mid Cap CORE,
Small Cap Value, Small Cap Growth, International Equity, Global
Balanced, International Opportunities, International Opportunities II, Emerging
Markets Equity, Bond Index, Core Bond, Global Bond, or High Yield Bond Funds.
(10) Purchase securities of any issuer, if (a) with respect to 75% of
the market value of its total assets, more than 5% of the Fund's total assets
taken at market value would at the time be invested in the securities of such
issuer, unless such issuer is the United States Government or its agency or
instrumentality, or (b) such purchase would result in more than 10% of the
outstanding voting securities of such issuer being held by the Fund. This
restriction (10) does not apply to the Large Cap Aggressive Growth, Mid Cap
Growth or Global Balanced Funds.
30
<PAGE>
(11) Issue senior securities. For the purposes of this restriction,
the following shall not be deemed to be the issuance of a senior security: the
use of futures contracts as permitted by restriction (3), above; the use of
option contracts as permitted by restriction (3), above; and the use of foreign
currency contracts.
The Aggressive Balanced, Equity Index, Large Cap Value, American
Leaders Large Cap Value, Large Cap Value CORE, Large Cap Aggressive Growth,
Large/Mid Cap Value, Mid Cap Value, Mid Cap Growth, Fundamental Mid Cap Growth,
Mid Cap Blend, Small/Mid Cap Value, Small/Mid Cap Growth, Small/Mid Cap CORE,
Small Cap Value, Small Cap Growth, Global Balanced, International Equity Index,
International Equity, International Opportunities, International Opportunities
II, Emerging Markets Equity, Short-Term Bond, Bond Index, Active Bond, Core
Bond, Global Bond, and High Yield Bond Funds will not purchase the securities of
issuers conducting their principal business activity in the same industry if,
immediately after such purchase, the value of the Trust's investments in such
industry would exceed 25% of its total assets taken at market value. For the
purpose of this restriction, telephone, water, gas and electric public utilities
are each regarded as separate industries, and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parent. In conformity
with its understanding of current interpretations of the Investment Company Act
by the staff of the SEC, the Trust, as a non-fundamental policy, interprets this
limitation not to apply to securities issued by the Federal government, or state
and local governments within the U.S., or political subdivisions thereof; but
this exception does not apply to securities of foreign government entities. If
these interpretations change, however, the Trust may modify its practices to
conform to such changes.
For purposes of any restrictions or limitation to which the Trust is
subject, no Fund, by entering into any futures contract or acquiring or writing
any option thereon or on any security or market index, shall be deemed
(1) to have acquired or invested in any securities of any exchange or
clearing corporation for any such instrument or
(2) to have acquired or invested in any debt obligations or in any
stocks comprising indexes on which such instrument is based, but which the Fund
does not hold directly in its portfolio.
BOARD OF TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust is responsible for overall
management of the Trust. The Board may exercise all powers of the Trust, except
those powers which are conferred solely upon or reserved to the shareholders.
The following table provides information about the members of the Board of
Trustees and the officers of the Trust:
<TABLE>
<CAPTION>
Name, Address and Age Positions Held With Trust Principal Occupation(s) During Past Five Years
--------------------- ------------------------- ----------------------------------------------
<S> <C> <C>
Michele G. Van Leer* (age 42) Senior Vice President, Product Management, John Hancock
John Hancock Place Chairman and Trustee Life Insurance Company; President & Director, John
Boston, Massachusetts 02117 Hancock Variable Life Insurance Company
Thomas J. Lee* (age 45) Vice Chairman, President and Vice President, Life and Annuity Services, John Hancock
John Hancock Place Trustee Life Insurance Company; Director, John Hancock Variable
Boston, Massachusetts 02117 Life Insurance Company
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Age Positions Held With Trust Principal Occupation(s) During Past Five Years
--------------------- ------------------------- ----------------------------------------------
<S> <C> <C>
Elizabeth G. Cook (age 62) Trustee Expressive Arts Therapist, Dana-Farber Cancer
85 East India Row Institute; President, The Advertising Club of Greater
Boston, Massachusetts 02110 Boston
Diane C. Kessler (age 53) Trustee Executive Director, Massachusetts Council of Churches
325 Parker Street
Newton Centre
Massachusetts 02159
Robert Verdonck (age 54) Trustee President and Chief Executive Officer, East Boston
One Bennington Street Savings Bank
East Boston
Massachusetts 02128
Hassell H. McClellan (age 54) Trustee Professor and Graduate Dean, The Graduate School of the
Boston College Wallace E. Carroll School of Management, Boston College
Graduate School of Management
Fulton 320
140 Commonwealth Avenue
Chestnut Hill, Massachusetts
02467
Raymond F. Skiba (age 54) Treasurer Director, Fund Operations, John Hancock Life Insurance
John Hancock Place Company
Boston, Massachusetts 02117
Karen Q. Visconti (age 47) Secretary Senior Marketing Consultant,
John Hancock Place Life Product Management
Boston, Massachusetts 02117
</TABLE>
* Ms. Van Leer and Mr. Lee are the only Trustees who are "interested persons" as
defined in the Investment Company Act. They also constitute the Trust's
Executive Committee. The Executive Committee may from time to time be delegated
power to act on behalf of the Board of Trustees, except with repect to
declarations of dividends or distributions, recommendations to the shareholders
on actions requiring shareholder approval, changes to the Trust's bylaws, or
mergers or share exchanges which do not require shareholder approval.
Certain members of the Trust's Board of Trustees may own either
variable annuity contracts or variable life insurance policies that are
supported by one of the Separate Accounts and, in that sense, have an interest
in shares of the Trust.
The combined interest of all the Trust's officers and Trustees, however, does
not aggregate as much as 1% of any Fund's net assets.
Compensation paid by the Trust to its current disinterested Trustees
during 1999 was as follows:
Ms. Cook $46,600.00
Ms. Kessler $30,550.00
Mr. Verdonk $30,250.00
The Trust paid no compensation to any other officer or Trustee.
32
<PAGE>
INVESTMENT ADVISORY ARRANGEMENTS
The Trust's Investment Advisory Arrangements With John Hancock
John Hancock, the Trust's investment adviser, is a Massachusetts
corporation. Until February 1, 2000, John Hancock was a mutual life insurance
company. Now, it is a subsidiary of John Hancock Financial Services, Inc., a
publicly-traded holding company. John Hancock provides advisory services to the
Fund pursuant to several investment advisory agreements. Each Fund is party to
one of these investment advisory agreements with John Hancock.
The Trust pays John Hancock investment advisory fees at the following
rates:
<TABLE>
<CAPTION>
John Hancock's Investment Advisory Fee
as an Annual Percentage of Each Portion
Fund of the Fund's Average Daily Net Assets
---- --------------------------------------
<S> <C>
Managed .40% of first $500 million; .35% of next $500 million; .30% above $1 billion
Large Cap Growth
Growth & Income .25%
Aggressive Balanced .675% of first $250 million; .625% of next $250 million; .60% above $500 million
Large Cap Value CORE .75% of first $50 million; .65% 0f next $150 million; .60% above $200 million
American Leaders Large Cap Value .80% of first $50 million; .65% of next $200 million; .60% of next $250 million;
.55% above $500 million
Large Cap Aggressive Growth 1.00% of first $10 million; .875% of next $10 million; .75% above $20 million
Active Bond .25%
Money Market .25%
Small Cap Growth .75%
Large Cap Value .75% of first $100 million; .70% of next $150 million; .65% above $250 million
Equity Index .15% of first $75 million; .14% of next $50 million; .13% above $125 million
Large/Mid Cap Value .95% of first $25 million; .85% of next $25 million; .75% of next $50 million; 65%
above $100 million
Small Cap Value .80% of first $100 million; .75% of next $100 million; .65% above $200 million
Mid Cap Value .80% of first $100 million; .775% of next $150 million; .75% of next $250 million;
.725% of next $250 million; .70% above $750 million
Mid Cap Growth .85% of first $100 million; .80% above $100 million
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
John Hancock's Investment Advisory Fee
as an Annual Percentage of Each Portion
Fund - continued of the Fund's Average Daily Net Assets - continued
---------------- --------------------------------------------------
<S> <C>
Fundamental Mid Cap Growth .85% of first $50 million; .80% of next $50 million; .75% of next $50 million; .70%
above $150 million
Real Estate Equity 1.10% of first $50 million; 1.00% of the next $50 million; .90% of the next $100
million; .80% above $200 million
Mid Cap Blend .75% of first $250 million; .70% of next $250 million; .65% above $500 million
Small/Mid Cap Growth .75% of first $250 million; .70% of next $250 million; .65% above $500 million
Small/Mid Cap Value .95% of first $100 million; .90% of next $150 million; .85% over $250 million
Small/Mid Cap CORE .80% of first $50 million; .70% above $50 million
Global Balanced .85% of first $100 million; .70% above $100 million
International Equity Index .18% of first $100 million; .15% of next $100 million; .11% above $200 million
International Equity 1.00% of first $50 million; .95% of next $150 million; .90% above $200 million
International Opportunities 1.00% of first $20 million; .85% of next $30 million; .75% above $50 million
International Opportunities II .90% of first $50 million; .80% of next $100 million; .70% above $150 million
Emerging Markets Equity 1.30% of first $10 million; 1.20% of next $140 million; 1.10% above $150 million
Short-Term Bond .30%
Bond Index .15% of first $100 million; .13% of next $150 million; .11% above $250 million
Core Bond .70% of first $25 million; .65% of next $25 million; .60% of next $100 million; .55%
above $150 million
Global Bond .75% of first $25 million; .65% of next $50 million; .55 of next $75 million; .50%
above $150 million
High Yield Bond .65% of first $100 million; .60% of next $100 million; .50% above $200 million
</TABLE>
Under its investment advisory agreements with the Trust, John Hancock
advises the Trust in connection with policy and strategy decisions; provides
administration of much of the Trust's day-to-day operations; serves as
34
<PAGE>
the Trust's transfer agent and dividend disbursing agent; prepares the Trust's
financial statements; maintains records required by the Investment Company Act
of 1940; and supervises activities of the subadvisers (discussed below) and of
other service providers to the Trust. John Hancock also provides the Trust with
office space, supplies and other facilities required for the business of the
Trust. John Hancock pays the compensation of Trust officers and employees and
the expenses of clerical services relating to the administration of the Trust.
To the extent that any administrative or legal services for the Trust are
provided by John Hancock's Law Department, however, John Hancock charges the
Trust separately, and the Trust pays such charges in accordance with the terms
of the investment advisory agreements.
All other expenses not expressly assumed by John Hancock under the
investment advisory agreements are paid by the Trust. These include, but are not
limited to, the Trust's taxes (if any); custodian fees; auditing fees; brokerage
commissions; advisory fees; the compensation of Trustees who are not affiliated
with John Hancock; the Trust's fidelity bond coverage; the costs of printing and
distributing annual and semi-annual reports and voting materials to holders of
variable annuity contracts and variable life insurance policies that participate
in the Trust; tabulating votes; fees for certain accounting, valuation, and
compliance services; legal fees; SEC registration costs; proxy costs; costs of
organizing any new Funds; and other expenses related to the Trust's operations.
The Trust's Arrangements With Subadvisers
Set forth below are the names to the Funds' subadvisers and certain
persons who may control them.
<TABLE>
<CAPTION>
Subadviser Subadviser's General Nature
and the Funds Controlling of
It Manages Person Basis of Control Control Person's Business
---------- ------ ---------------- -------------------------
<S> <C> <C> <C>
1. Independence Investment Associates, John Hancock Indirectly owns 100% of Financial services holding company
Inc. (Managed, Growth & Income, Financial Services voting stock
Large Cap Growth, Real Estate Inc.
Equity, Short-Term Bond, Aggressive Life insurance and other financial
Balanced, and Mid-Cap Blend Funds) John Indirectly owns services provided directly or
Hancock 100% of voting stock through subsidiaries
Life Insurance
Company
2. John Hancock Advisers, Inc. (Small Same as 1. above.
Cap Growth and Active Bond Funds)
3. State Street Bank & Trust Company State Street Owns 100% of the Financial services holding company
(Equity Index Fund) Corporation subadviser
4. T. Rowe Price Associates, Inc. None Publicly traded investment adviser
(Large Cap Value Fund) and financial services company
5. Neuberger & Berman, LLC (Mid Cap Neuberger Berman Inc. Owns 100% of the Financial services holding company
Value Fund) subadviser
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Subadviser Subadviser's General Nature
and the Funds Controlling of
It Manages - continued Person Basis of Control Control Person's Business
---------------------- ------ ---------------- -------------------------
<S> <C> <C> <C>
6. Janus Capital Corporation Kansas City Southern Indirectly owns 82% of Publicly traded transportation and
(Mid Cap Growth Fund) Industries, Inc. the subadviser financial services company
Thomas H. Bailey Private Investor
Owns 12% of the
subadviser and, by
contract, may elect
majority of the
subadviser's directors
7. Goldman Sachs Asset Management Goldman Sachs & Co. The subadviser is a unit Publicly traded investment banking
(Small/Mid Cap CORE, Large Cap Value of the Investment and financial services company
CORE, and International Equity Funds Management Division of
Goldman Sachs & Co.
8. INVESCO Management & Research, Inc. AMVESCAP, Inc. Indirectly owns 100% of Financial services holding company
(Small Cap Value Fund) voting stock
9. Brinson Partners, Inc. (Global UBS AG Indirectly owns 100% of Full service global financial
Balanced Fund) voting stock services company
10. Independence Inter-national John Hancock Indirectly owns 100% of Financial services holding company
Associates, Inc. (International Financial Services voting stock
Equity Index Fund) Inc.
Life insurance and other financial
John Hancock Life Indirectly owns services provided directly or
Insurance Company 100% of voting stock through subsidiaries
Independence Investment manager and adviser
Investment Owns 100% of voting
Associates, Inc. stock
11. Rowe Price Fleming International, T. Rowe Price Owns 50% of the subadviser Publicly traded investment adviser
Inc. (International Opportunities Associates, Inc. and financial services company;
Fund, International Opportunities
II Fund)
Owns, directly and Financial services company
Robert Fleming indirectly, 50% of the
Holdings, Ltd. subadviser
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Subadviser Subadviser's General Nature
and the Funds Controlling of
It Manages - continued Person Basis of Control Control Person's Business
---------------------- ------ ---------------- -------------------------
<S> <C> <C> <C>
12. Morgan Stanley Dean Witter Morgan Stanley Dean Directly owns 100% of
Investment Management Inc. (Emerging Witter & Co. voting stock
Markets Equity and Real Estate
Equity Funds)
13. Mellon Bond Associates, LLP (Bond Mellon Financial Directly owns 100% of the Bank holding company
Index Fund) Corporation subadviser
14. J.P. Morgan Investment Management J.P.Morgan & Co. Owns 100% of the Financial services holding company
Inc. (Global Bond Fund) Incorporated subadviser
15. Wellington Management Company, LLP Laurie A. Gabriel; Managing Partners Investment management
(High Yield Bond, Small/Mid Cap Duncan M. McFarland;
Growth, and Large/Mid Cap Value John R. Ryan
Funds)
16. Alliance Capital Management, LLP The Equitable Life ELAS and its subsidiaries Life insurance and other financial
(Large Cap Aggressive Growth) Assurance Society of owned (as of 11/1/99) services
the U.S. ("ELAS") 55.38% partnership
interest in the subadviser
17. The Boston Company Asset Management, Mellon Financial The subadviser is an Financial services holding company
LLC (Small/Mid Cap Value Fund) Corporation indirect wholly owned
("Mellon") subsidiary of Mellon
18. OppenheimerFunds, Inc. (Fundamental Massachusetts Mutual MML indirectly owns a Life insurance and other financial
Mid Cap Growth Fund) Life Insurance majority of the services
Company ("MML") subadviser's voting stock
19. Federated Investment Management Federated Investors, The subadviser is a Investment management and related
Company Inc. subsidiary of Federated financial services
Investors, Inc.
</TABLE>
37
<PAGE>
Set forth below are the sub-advisory fees that John Hancock pays the subadvisers
for each Fund. The below fees are paid by John Hancock and not by the Funds.
<TABLE>
<CAPTION>
Subadvisory Fees Payable by John Hancock,
Fund as a Percentage of Each Fund's Average Daily Net Assets
---- -------------------------------------------------------
<S> <C>
Large Cap Growth, .30% of first $500 million; .2625% of next $500 million; and .225% above $1 billion
Managed
Growth & Income, .1875%
Active Bond
Real Estate Equity Assets managed by Independence Investment Associates, Inc.: .30% of first $300 million;
.25% of next $500 million; and .20% above $800 million
Assets managed by Morgan Stanley Dean Witter Investment Management Inc.: .70%
of first $50 million; .60% of next $50 million; .50% of next $100 million; and .40%
above $200 million
Short-Term Bond .19% of first $250 million; .17% of next $250 million; and .15% above $500 million
Aggressive Balanced .325% of first $250 million; .275% of next $250 million; and .25% above $500 million
Mid Cap Blend .40% of first $250 million; .35% of next $250 million; and .30% above $500 million
Small Cap Growth .50%
Equity Index .07% of first $75 million; .06% of next $50 million; .05% of next $275 million; and .03% above $400
million
Large Cap Value .50% of first $100 million; .45% of next $150 million; and .40% above $250 million
American Leaders Large .40% of first $50 million; .25% of next $200 million; .20% of next $250 million; .15% above $500
Cap Value million
Mid Cap Value .50% of first $100 million; .475% of next $150 million; .45% of next $250 million; .425% of next $250
million; and .40% above $750 million
Mid Cap Growth .60% of first $100 million; .55% of the next $400 million; and .45% above $500 million
Small/Mid Cap .60% of first $50 million; and .50% above $50 million
CORE
Large Cap Value .40% of first $50 million; .30% of next $150 million; and .25% above $200 million
CORE
International Equity .60% of first $50 million; .55% of next $150 million; and .50% above $200 million
Small Cap Value .55% of first $100 million; .50% of next $100 million; and .40% above $200 million
Global Balanced .50% of first $100 million; and .35% above $100 million
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Subadvisory Fees Payable by John Hancock,
Fund - continued as a Percentage of Each Fund's Average Daily Net Assets - continued
---------------- -------------------------------------------------------------------
<S> <C>
International Equity .125% of first $100 million; .10% of next $100 million; and .06% above $200 million
Index
International .75% of first $20 million; .60% of next $30 million; .50% of next $150 million; and
Opportunities 50% of all assets if the Fund reaches $200 million of net assets
---
International .70% of first $50 million; .60% of next $100 million; and .50% above $150 million
Opportunities II
Emerging Markets 1.10% of first $10 million; .90% of next $140 million; and .80% above $150 million.
Equity
Core Bond .30% of first $25 million; .25% of next $25 million; .20% of next $100 million; .15% above $150
million
Bond Index .08% of first $100 million; .06% of next $150 million; and .04% above $250 million
Global Bond .50% of first $25 million; .40% of next $50 million; .30% of next $75 million; and .25% above $150
million
High Yield Bond .50% of first $100 million; .45% of next $100 million; and .35% above $200 million.
Small/Mid Cap .55% of first $100 million; .45% of next $100 million; and .40% above $200 million
Growth
Large/Mid Cap .60% of first $25 million; .50% of next $25 million; .40% of next $50 million; and .30% above $100
Value million
Large Cap .75% of first $10 million; .625% of next $10 million; and .50% above $20 million
Aggressive Growth
Small/Mid Cap .65% of first $100 million; .60% of next $150 million; and .55% above $250 million
Value
Fundamental Mid .50% of the first $50 million; .45% of next $50 million; .40% of next $50 million; and .35% above
Cap Growth $150 million
</TABLE>
Dollar Amounts of Advisory Fees, Subadvisory Fees, and Expense Reimbursements
Set out below are the dollar amounts of advisory fees that the Trust
paid to John Hancock and the subadvisory fees that John Hancock paid to
subadvisers for the past three years:
<TABLE>
<CAPTION>
Fund Investment Adviser Subadvisers*
---- --------------------------------------------------- ---------------------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Aggressive Balanced .......... $ 23,956 -- -- $ 11,118 -- --
Managed ...................... 10,789,553 9,825,708 8,515,377 8,001,416 7,369,096 6,386,533
Growth & Income .............. 9,806,770 7,959,851 6,125,461 7,269,220 5,970,179 4,532,841
Equity Index ................. 448,044 270,965 95,900 181,624 134,418 33,565
Large Cap Value .............. 1,087,807 746,229 328,969 710,068 497,498 219,423
Large Cap Value CORE ......... 13,622 -- -- 6,990 -- --
Large Cap Growth ............. 4,378,106 3,445,963 2,520,205 3,250,179 2,584,378 1,890,154
Large Cap Aggressive
Growth .................... 38,421 -- -- 27,498 -- --
Large/Mid Cap Value .......... 16,857 -- -- 10,259 -- --
Mid Cap Value ................ 735,223 708,164 251,970 469,451 486,843 173,229
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Fund - continued Investment Adviser Subadvisers*
----------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Mid Cap Growth ........................... 1,646,277 506,917 230,304 1,119,977 357,811 162,595
Real Estate Equity ....................... 835,184 1,071,226 1,052,761 413,496 535,611 526,381
Small/Mid Cap Value ...................... 15,837 -- -- 10,454 -- --
Small/Mid Cap Growth ..................... 1,360,053 1,490,558 1,564,619 902,527 993,730 1,043,601
Fundamental Mid Cap
Growth ................................ 17,491 -- -- 9,805 -- --
Mid Cap Blend ............................ 13,034 -- -- 6,703 -- --
Small/Mid Cap CORE ....................... 47,616 24,490 -- 35,177 18,367 --
Small Cap Value .......................... 512,633 444,992 187,062 348,363 305,920 128,605
Small Cap Growth ......................... 732,594 420,449 251,331 478,916 280,306 167,638
International Balanced ................... 253,044 235,511 214,682 147,136 138,538 126,233
International Equity Index ............... 313,649 503,992 968,010 210,822 339,357 645,663
International Equity ..................... 35,992 -- -- 20,788 -- --
International
Opportunities ......................... 582,128 440,905 234,405 409,561 821,925 175,804
International Opportunities II ........... 157,808 87,055 -- 121,054 67,708
Emerging Markets
Equity ................................ 182,265 67,915 -- 145,114 57,466 --
Short-Term Bond .......................... 216,170 192,680 220,493 135,464 122,022 83,787
Bond Index ............................... 48,433 26,490 -- 25,498 14,128 --
Active Bond .............................. 2,214,912 2,127,466 4,243,027 1,643,765 1,595,666 1,410,726
Global Bond .............................. 488,070 328,177 142,441 306,570 211,575 95,008
High Yield Bond .......................... 111,177 49,428 -- 84,425 38,023 --
Money Market ............................. 965,427 748,405 564,173 953,183 -- --
</TABLE>
----------------------------
* Paying these fees to the sub-advisers is solely the responsibility of John
Hancock and not the Trust.
Under the investment advisory agreements, for any fiscal year in
which the normal operating costs and expenses of any Fund, exclusive of the
investment advisory fee, interest, brokerage commissions, taxes and
extraordinary expenses outside the control of John Hancock exceed 0.10% (.25%
prior to April 23, 1999) of that Fund's average daily net assets, John Hancock
will reimburse that Fund in an amount equal to such excess. These reimbursements
have been as follows for the past three years (rounded to the nearest $1,000):
Fund 1999 1998 1997
---- ---- ---- ----
Aggressive Balanced ............. $ 6,609 -- --
Equity Index .................... 275,336 543,000 217,000
Large Cap Value ................. -- -- 25,000
Large Cap Value CORE ............ 5,824 -- --
Large Cap Aggressive Growth ..... 3,504 -- --
Large/Mid Cap Value ............. 6,512 -- --
Mid Cap Value ................... -- -- 29,000
Mid Cap Growth .................. -- 15,000 86,000
Small/Mid Cap Growth ............ 1,790 -- --
Small Cap Value ................. 6,224 17,000 57,000
Small Cap Growth ................ 27,000 38,000
Global Balanced ................. 91,146 199,000 116,000
40
<PAGE>
Fund - continued 1999 1998 1997
---- ---- ---- ----
International Equity Index 21,900 124,000 --
International Equity 21,901 -- --
International Opportunities 92,017 145,000 86,000
International Opportunities II 62,210 126,000 --
Global Bond 1,445 31,000 61,000
Fundamental Mid Cap Growth 2,888 -- --
Mid Cap Blend 6,011 -- --
Small/Mid Cap CORE 77,179 107,000 --
Small/Mid Cap Value 9,254 -- --
Emerging Markets Equity 294,354 111,000 --
Bond Index 17,185 56,000 --
High Yield Bond 42,314 85,000 --
ARRANGEMENTS WITH OTHER SERVICE PROVIDERS
TO THE TRUST
Underwriting and Indemnity Agreement
Pursuant to an Underwriting and Indemnity Agreement, Signator Investors,
Inc. ("Signator") serves as the Trust's principal underwriter, and John Hancock
provides certain indemnities to the Trust and its Trustees. Neither Signator nor
John Hancock receives any additional compensation from the Trust for the
services and indemnities they provide pursuant to the Underwriting and Indemnity
Agreement. The offering of the Trust's shares through Signator is a continuous
offering on a "best efforts" basis. Signator is a wholly-owned subsidiary of
John Hancock and is located at 197 Clarendon Street, Boston, MA 02117.
Custody of the Trust's Assets
State Street Bank and Trust Company ("State Street Bank") is the primary
custodian of the assets of all Funds. State Street Bank's principal business
address is 225 Franklin Street, Boston MA 02110. The primary custodian's duties
include safeguarding and controlling the Trust's cash and investments, handling
the receipt and delivery of securities, and collecting interest and dividends on
the Trust's investments. Fund securities purchased in the United States are
maintained in the custody of State Street Bank, although such securities may be
deposited in the book-entry system of the Federal Reserve System, with
Depository Trust Company, or with other qualified domestic book-entry systems or
depositories. Also, pursuant to its agreement with the Trust, State Street Bank
provides certain accounting and recordkeeping services to the Trust and
generally values the Trust's assets by computing each Fund's net asset value
each day. The Trust compensates State Street Bank for these functions through
the payment of an annual custody asset fee of .01% of the total net assets of
the Trust, allocated to each Fund based on the percentage of that Fund's total
net assets to the total net assets of the Trust; miscellaneous transaction
charges ranging from $7.00 to $25.00; global asset and transaction fees that
vary by the country in which a Fund's assets are held or traded; a monthly
accounting fee charge that is allocated to each Fund based on the percentage of
that Fund's total net assets to the total net assets of the Trust; valuation and
monthly quote charge; special service fees for activities of a non-recurring
nature; and reimbursement of specified out-of-pocket expenses.
Foreign securities are generally held through subcustodian banks and
depositories around the world with whom State Street Bank has relationships. In
some cases, Funds whose securities are held in this manner may be exposed to
greater risks of loss. This is because the soundness of such foreign entities,
as well as foreign regulatory practices and procedures, may provide less
protection to security holders than is available in the U.S.
In certain circumstances, brokers may have access to assets that a Fund
posts as "margin" in connection with futures and options transactions. In the
event of a broker's insolvency or bankruptcy, a Fund could experience a delay or
incur costs in recovering such assets or might recover less than the full amount
due. Also the value of such assets could decline by the time the Trust could
effect such recovery.
41
<PAGE>
If on any day a Fund experiences net realized or unrealized gains with
respect to financial futures contracts held through a given broker, it will be
entitled immediately to receive from the broker the net amount of such gains.
The Trust will request payment of such amounts promptly after notification by
the broker that such amounts are due. Thereupon, these assets will be deposited
in the Trust's general or segregated account with its primary custodian, as
appropriate.
Subadministration Agreement With State Street Bank
Pursuant to a subadministration agreement, with the Trust, State Street
Bank also provides assistance to John Hancock and the subadvisers in computing
total return information for the Trust and in monitoring each Fund's compliance
with the Fund's investment objectives and restrictions, as well as compliance
with certain other applicable legal requirements, . The Trust compensates State
Street Bank for these services through payment of an annual fee that accrues
daily and is billed monthly in arrears. The annual fee is based on the average
net assets of the Trust and is 0.012% of the first $1 billion of average net
assets, 0.0075% of the next $1 of average net assets, and 0.0025% of average net
assets after that. Each Fund is allocated the greater of a minimum monthly Fund
fee or the basis point annual fee, based on the pro-rata total net asset value
of that Fund. The minimum monthly Fund fee is phased-in for new Funds at the
rate of 1/12 in month one, 2/12th in month two, increasing incrementally per
month until the full monthly minimum is in effect in month 12 ($1,333).
Independent Auditors
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts, are the
independent auditors of the Trust. Ernst & Young audits the financial statements
of the Trust, prepares the Trust's tax returns, and renders other advice to the
Trust concerning accounting and tax matters. Ernst & Young also meets
periodically with the Trust's Board and with the Audit Committee of the Board to
discuss matters within the scope of Ernst & Young's activities with respect to
the Trust.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Funds pay brokers' commissions, transfer taxes, and other fees relating
to their specific portfolio transactions. (Investments in debt securities are,
however, generally traded on a "net" basis through issuers or dealers acting for
their own account as principals and not as brokers. Therefore, no brokerage
commissions are payable on most such transactions, although the price to the
Trust usually reflects a dealer "spread" or "mark-up.")
Amounts of Brokerage Paid
Brokerage commissions paid by the Funds were as follows for the past three
years:
Fund 1999 1998 1997
---- ---- -------- ----
Aggressive Balanced ............ $ 4,424 $ -- $ --
Managed ........................ 2,385,643 1,843,929 1,626,154
Growth & Income ................ 4,741,953 2,673,170 1,646,997
Equity Index ................... 61,865 33,797 31,076
Large Cap Value ................ 110,393 63,944 45,619
Large Cap Value CORE ........... 3,240 -- --
Large Cap Growth ............... 1,389,454 815,587 680,933
Large Cap Aggressive Growth .... 11,885 -- --
Large/Mid Cap Value ............ 6,876 -- --
Mid Cap Value .................. 383,634 495,154 122,108
Mid Cap Growth ................. 245,913 146,033 71,998
Real Estate Equity ............. 122,021 177,186 122,897
Fundamental Mid Cap Growth ..... 3,082 -- --
Mid Cap Blend .................. 5,586 -- --
42
<PAGE>
Fund - continued 1999 1998 1997
---------------- ---- ---- ----
Small/Mid Cap Value ............. 21,848 -- --
Small/Mid Cap CORE .............. 12,371 7,225 --
Small/Mid Cap Growth ............ 621,068 893,945 1,876,203
Small Cap Value ................. 284,381 176,549 138,114
Small Cap Growth ................ 146,206 103,248 67,492
Global Balanced ................. 47,678 51,205 27,745
International Equity Index ...... 133,746 730,529 750,416
International Equity ............ 16,561 -- --
International Opportunities ..... 74,940 117,083 63,138
International Opportunities II .. 25,925 37,426 --
Emerging Markets Equity ......... 189,025 10,018 --
Bond Index ...................... 598 -- --
High Yield Bond ................. 200 -- --
How Brokers and Dealers are Selected
Orders for the purchase and sale of Fund portfolio investments are placed
by John Hancock with respect to the Money Market Fund and by the respective
subadvisers to the other Funds. All of these subadvisers place orders in such
manner as, in their opinion, will offer the best overall price and execution of
each transaction. In seeking the best price and execution for equity securities
traded only in the over-the-counter market, they normally deal directly with the
principal market-makers.
The subadvisers are governed in the selection of brokers and dealers and
the negotiation of brokerage commission rates (or the payment of net prices in
the case of debt securities) by the reliability and quality of the broker's or
dealer's services. Although some weight is given to the availability and value
of research and statistical assistance (discussed immediately below) furnished
by the broker or dealer to the subadviser, it is not always possible to place a
dollar value on such information and services. Because it is only supplementary
to the subadvisers' own research efforts, the receipt of research information
and statistical assistance is not expected to reduce their expenses measurably.
Research and Statistical Services Furnished by Brokers and Dealers
Research and statistical assistance typically furnished by brokers or
dealers includes analysts' reports on companies and industries, market
forecasts, and economic analyses. Brokers or dealers may also provide reports on
pertinent federal and state legislative developments and changes in accounting
practices; direct access by telephone or meetings with leading research analysts
throughout the financial community, corporate management personnel, industry
experts, leading economists and government officials; comparative performance
and evaluation and technical performance measurement services; portfolio
optimization software; availability of economic advice; quotation services; and
services from recognized experts on investment matters of particular interest to
the subadviser. In addition, the foregoing services may comprise the use of or
be delivered by computer systems whose software and hardware components may be
provided to the subadviser as part of the services. In any case in which the
foregoing systems can be used for both research and non-research purposes, the
subadviser makes an appropriate allocation of those uses and will permit brokers
and dealers to provide only the portion of the systems to be used for research
services.
Research and statistical services furnished by brokers and dealers handling
the Funds' transactions may be used by the subadvisers for the benefit of all of
the accounts managed by them and not all of such research and statistical
services may be used by the subadvisers in connection with the Funds.
43
<PAGE>
Relationship Between Brokerage Commissions and Research and Statistical Services
Furnished by Brokers and Dealers
Except as to the Global Balanced Fund, the subadvisers or the Funds will
not at any time make a commitment pursuant to an agreement with a broker because
of research services provided. Nor, except as set forth below, will John Hancock
or the subadvisers direct brokerage upon any prescribed basis to a broker
because of research services provided.The subadviser for each of the Small Cap
Value, Small/Mid Cap Value, Mid Cap Growth, and Mid Cap Value Funds may have an
internal procedure for allocating transactions, in a manner consistent with its
execution policy, to brokers that it has identified as providing superior
executions, research, or research related products or services which benefit its
advisory clients, including the Fund. In certain cases, the subadviser of the
Global Balanced Fund directs securities transactions for that Fund to particular
brokers, in recognition of research services the broker has provided, pursuant
to an understanding or agreement with the broker or pursuant to the subadviser's
own internal allocation procedures.
Evaluations of the overall reasonableness of any broker's commissions are
made by the subadvisers' traders for the Funds on the basis of their experience
and judgment. To the extent permitted by Section 28(e) of the Securities
Exchange Act of 1934, such traders are authorized to pay a brokerage commission
on a particular transaction in excess of what another broker might have charged
in recognition of the value of the broker's brokerage or research services. Such
authority is generally expected to be used very infrequently. The Mid Cap
Growth, Small/Mid Cap Value, Mid Cap Value, and Global Balanced Funds, however,
may be more likely to use such authority.
Brokerage Transactions in Foreign Markets
Brokerage transactions in securities of companies domiciled in countries
other than the United States are anticipated to be normally conducted on the
stock exchanges or other markets of those countries in which the particular
security is traded. Fixed commissions on foreign stock exchange transactions are
generally higher than negotiated commissions available in the United States.
Moreover, there is generally less government supervision and regulation of
foreign stock exchanges and broker-dealers than in the United States. Settlement
periods in non-U.S. markets may differ from the normal settlement period in the
United States.
Simultaneous Transactions with Other Accounts
The subadvisers also perform investment advisory services for a number of
other accounts and clients, none of which is given preference over the Trust in
allocating investment opportunities. When opportunities occur which are
consistent with the investment objective of more than one account, it is the
policy of each subadviser to avoid favoring any one account over another.
Accordingly, investment opportunities in such cases are allocated in a manner
deemed equitable by the subadvisers to the particular accounts involved. The
allocation may be based, for example, on such factors as the accounts'
respective investment objectives and then current investment and cash positions.
Subject to these requirements, Trust orders may be combined with orders of other
accounts or clients advised by any of the subadvisers at prices which are
approximately averaged.
Use of Brokers Who are Affiliated With a Subadviser
A Fund may place portfolio transactions through certain brokers who are
affiliated with the Fund's subadviser. The Trust has implemented special
procedures governing the circumstances of these transactions. In addition to
complying with any applicable provisions of the Trust's procedures, these
transactions must comply with all applicable legal requirements, including,
where applicable, Rule 17e-1 under the Investment Company Act. Among other
things, that rule requires the commissions or other compensation paid to the
affiliated broker to be reasonable and fair compared to those in similar
transactions between unrelated parties.
44
<PAGE>
Set forth below is information about transactions by each Fund with affiliated
brokers in reliance on Rule 17e-1 for each of the past three years:
<TABLE>
<CAPTION>
Amount of Commissions
Name Nature of Broker's Paid by Fund
of Affiliation with -------------------------------------------
Fund Affiliated Broker Fund's Sub-Adviser 1999 1998 1997
---- ----------------- ------------------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
International Ord Minnett Group Ltd. Wholly-owned subsidiary of $ 34 $ 263 $ 122
Opportunities sub-adviser's parent
International Jardine Fleming & Co. Wholly-owned subsidiary of $ 710 $ 311 $ 295
Opportunities sub-adviser's parent
International Robert Fleming Wholly-owned subsidiary of $ 1,166 $ 1,018 $ 741
Opportunities Securities, Ltd. sub-adviser's parent
Mid Cap Value Neuberger Berman, LLC Dual operating division of $80,598 $366,985 $68,000
sub-adviser's parent
Large Cap Value CORE Goldman, Sachs & Co. Dual operating division of $ 96 - 0 - - 0 -
sub-adviser's parent
Small/Mid Cap CORE Goldman, Sachs & Co. Dual operating division of $ 120 - 0 - - 0 -
parent of sub-adviser
Emerging Markets Equity Morgan Stanley Asia Wholly-owned subsidiary of $ 2,779 - 0 - - 0 -
Limited sub-adviser's parent
Emerging Markets Equity Morgan Stanley Wholly-owned subsidiary of $ 3,276 - 0 - - 0 -
International Limited sub-adviser's parent
</TABLE>
For 1999, the total dollar amount of such transactions through affiliated
brokers as a percentage of all brokerage-type transactions was 4.9% for the
International Opportunities Fund, 15.8% for the Mid Cap Value Fund, .18% for the
Large Cap Value CORE Fund, .07% for the International Equity Fund, .02% for the
Small/Mid Cap CORE Fund, and 1.2% of the Emerging Markets Equity Fund. For 1999,
the total brokerage commissions on such transactions through affiliated brokers,
as a percentage of commissions paid on all brokerage-type transactions was 3.2%
for the International Opportunities Fund, 26.5% for the Mid Cap Value Fund, 3%
for the Large Cap Value CORE Fund, 1% for the Small/Mid Cap CORE Fund, and 3.3%
for the Emerging Markets Equity Fund.
CODES OF PERSONAL CONDUCT
The Funds (other than the Money Market Fund), John Hancock, and the Trust's
principal underwriter have adopted, and the Trustees have approved, codes of
conduct for their officers, directors and other personnel. Among other things
these codes regulate (although they do not absolutely prohibit) transactions by
such persons in securities of a type in which the Funds may and do invest. The
subadvisers have adopted codes of conduct that are similar to the Fund's except
that certain subadvisers may prohibit certain of their key personnel from
personal trading in certain types of securities such as initial public offerings
or private offerings.
FEATURES OF THE TRUST'S SHARES
The shares of beneficial interest of the Trust currently are divided into
33 series, each corresponding to one of the Trust's 33 Funds. The Trust has the
right to establish additional series and issue additional shares without the
consent of its shareholders.
If the holders of variable annuity contracts and variable life insurance
policies show minimal interest in any Fund, the Trust's Board of Trustees, by
majority vote, may eliminate the Fund or substitute shares of another investment
company. Any such action by the Board would be subject to compliance with any
requirements for governmental approvals or exemptions or for shareholder
approval. The holders of variable annuity contracts and variable life insurance
policies participating in any such Fund will be notified in writing of the
Trust's intention to eliminate the Fund and given 30 days to transfer amounts
from such Fund to other Funds without incurring any
45
<PAGE>
transaction fee. Amounts not transferred or withdrawn would automatically be
transferred, at the discretion of the Fund's management.
The assets received by the Trust for the issuance or sale of shares of each
Fund and all income, earnings, profits, and proceeds thereof are specifically
allocated to that Fund. They constitute the underlying assets of each Fund, are
segregated on the books of the Trust, and are to be charged with the expenses of
such Fund. Any assets which are not clearly allocable to a particular Fund or
Funds are allocated in a manner determined by the Board of Trustees. Accrued
liabilities which are not clearly allocable to one or more Funds would generally
be allocated among the Funds in proportion to their relative net assets before
adjustment for such unallocated liabilities.
Each issued and outstanding share in a Fund is entitled to participate
equally in dividends and distributions declared with respect to such Fund and in
the net assets of such Fund upon liquidation or dissolution remaining after
satisfaction of outstanding liabilities.
A dividend from the net investment income of the Money Market Fund will be
declared and distributed daily. Dividends from net investment income of the
other Funds will be declared and distributed monthly. The Trust will distribute
all of its net realized capital gains annually. Dividends and capital gains
distributions will normally be reinvested in additional full or fractional
shares of the Fund to which they relate and will be appropriately credited to
investment performance under the variable life insurance policies and variable
annuity contracts participating in that Fund.
The shares of each Fund, when issued, will be fully paid and
non-assessable, and will have no preference, preemptive, exchange or similar
rights. Shares do not have cumulative voting rights.
SHAREHOLDER MEETINGS AND VOTING RIGHTS
Under the Trust's Declaration of Trust, the Trust is not required to hold
an annual shareholders' meeting. Normally, for example, there will be no
shareholders meetings for the purpose of electing Trustees.
In addition, it is expected that the Trustees generally will elect their
own successors and appoint Trustees to fill any vacancy, so long as, after
filling the vacancy, at least two-thirds of the Trustees then in office have
been elected by the shareholders.
Notwithstanding the above if at any time less than a majority of Trustees
in office have been elected by the shareholders, the Trustees must call a
special shareholders' meeting promptly. Also the Trustees will promptly call a
meeting of shareholders for the purpose of voting upon the question of removal
of any Trustee or all of the Trustees, if requested in writing to do so by
holders of 10% or more of the outstanding shares. In this regard, whenever ten
or more shareholders who have been such for at least six months and who hold in
the aggregate either shares having a net asset value of at least $25,000 or at
least 1% of the outstanding shares, whichever is less, apply to the Trustees in
writing stating that they wish to communicate with other shareholders with a
view to obtaining signatures to a request for a shareholders' meeting, for
consideration of the removal of any or all of the Trustees and accompanied by
the material which they wish to transmit, the Trustees will within five business
days after receipt either afford to such applicants access to the Trust's
shareholder list or inform such applicants as to the approximate number of
shareholders of record, and the approximate cost of mailing the material. If the
Trustees elect the latter, the Trustees, upon written request of such
applicants, accompanied by the material to be mailed and the reasonable expenses
of mailing, shall promptly mail such material to all shareholders of record,
unless within five business days the Trustees shall mail to such applicants and
file with the SEC, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Trustees to the effect that, in
their opinion, either such material is misleading or in violation of applicable
law and specifying the basis of such opinion.
At any shareholders' meeting, all shares of the Trust of whatever class are
entitled to one vote, and the votes of all classes are cast on an aggregate
basis, except on matters where the interests of the Funds differ. Where the
interests of the Funds differ, the voting is on a Fund-by-Fund basis. Approval
or disapproval by the shareholders in one Fund on such a matter would not
generally be a prerequisite of approval or disapproval by shareholders in
another Fund; and shareholders in a Fund not affected by a matter generally
would not be entitled to vote on that
46
<PAGE>
matter. Examples of matters which would require a Fund-by-Fund vote are changes
in the fundamental investment policy of a particular Fund and approval of
investment management or sub-investment management agreements.
SALES AND REDEMPTIONS OF FUND SHARES
"Seed Money" Shares
Typically, when a new Fund is added to the Trust, John Hancock (or one of
its affiliates) initially purchases a substantial amount of that Fund's shares
to provide the new fund with a reasonable asset base with which to commence
operations. For example, the most recent such contributions of "seed money" have
been as follows:
"Seed Money" Date
Shares Purchased by of
Fund John Hancock Purchase
---- -------------- ----------
Aggressive Balanced $10,000,000 8/31/99
Equity Index 15,000,000 5/1/98
Large Cap Value CORE 5,000,000 8/31/99
Large Cap Aggressive Growth 10,000,000 8/31/99
Large/Mid Cap Value 5,000,000 8/31/99
Fundamental Mid Cap Growth 5,000,000 8/31/99
Mid Cap Blend 5,000,000 8/31/99
Small/Mid Cap CORE 5,000,000 5/1/98
Global Balanced 20,000,000 5/1/96
International Equity 10,000,000 8/31/99
International Opportunities II 15,000,000 5/1/98
Emerging Markets Equity 10,000,000 5/1/98
Bond Index 2,500,000 5/1/98
High Yield Bond 10,000,000 5/1/98
John Hancock (or its affiliate) may redeem these shares (and thus withdraw
its seed money investment) at some time. However, before withdrawing any part of
their interests in any Fund, John Hancock (or its affiliate) will consider any
possible adverse impact the withdrawal might have on that Fund.
Purchases and redemptions of seed money shares are made at the applicable
Fund's net asset value per share (with no additions or deductions for charges)
next computed after the purchase or redemption order is placed.
Shares Sold and Redeemed In Connection With Transactions Under Variable Annuity
Contracts and Variable Life Insurance Policies
Fund shares are sold at their net asset value as next determined after
receipt of net premiums by the Separate Account, without the addition of any
selling commission or sales load.
Shares are redeemed at their net asset value as next determined after
receipt of net surrender requests by the Separate Account. No fee is charged on
redemption. Redemption payments will usually be paid within seven days after
receipt of the redemption request, except that the right of redemption may be
suspended or payments postponed whenever permitted by applicable law and
regulations. Redemptions are normally made in cash, but the Trust reserves the
right, at its discretion, to make full or partial payment by assignment to the
appropriate Separate Account of portfolio securities at their value used in
determining the redemption price. In such cases, the Separate Account would
incur brokerage costs should it wish to liquidate these portfolio securities.
Trust shares are also sold and redeemed as a result of transfer requests,
loans, loan repayments, and similar Separate Account transactions, in each case
without any sales load or commission or at the net asset value per share
computed for the day as of which such Separate Account transactions are
effected.
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COMPUTING THE FUNDS' NET ASSET VALUE
The net asset value per share of each Fund is determined once daily, after
the declaration of dividends, if any, as of 4:00 p.m., New York City time, on
each business day the New York Stock Exchange ("Exchange") is open for regular
trading. For this purpose, however, certain derivative instruments may be valued
using prices as late as 4:15 p.m.
The net asset value per share of each Fund is determined by adding the
value of all portfolio securities and other assets, deducting all portfolio
liabilities, and dividing by the number of outstanding shares. All Trust
expenses will be accrued daily for this purpose.
Short-term investments with a remaining maturity of 60 days or less, and
all investments of the Money Market Fund, are valued at "amortized cost," which
approximates market value. This involves valuing a security at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates. While this
method provides certainty in valuation, it may result in periods during which
the value of an instrument, as determined by amortized cost, is higher or lower
than the price the Fund would receive upon the sale of the instrument.
The Board of Trustees has established procedures designed to stabilize the
Money Market Fund's price per share, as computed for the purpose of sales and
redemptions, at $10. There can be no assurance, however, that the Fund will at
all times be able to maintain a constant $10 net asset value per share. Such
procedures include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's net asset value, calculated by using
available market quotations, deviates from $10 per share and, if so, whether
such deviation may result in material dilution, or is otherwise unfair to
existing shareholders. In the event that it is determined that such a deviation
exists, the Board of Trustees will take such corrective action as it regards as
necessary and appropriate. Such action may cause losses or gains to be recorded
for the Fund, including decreases or increases in the Fund's net asset value per
share.
Securities and covered call and put options that are listed on a stock
exchange are normally valued at the closing sales price. If there were no sales
during the day, they are normally valued at the last previous sale or bid price
reported, as are equity securities that are traded in the over-the-counter
market.
Non-exchange traded debt securities (other than certain short-term
investments) are valued on the basis of valuations furnished by a pricing
service which uses electronic data processing techniques, without exclusive
reliance upon quoted prices.
Any other security for which market quotations are not readily available,
and any other property for which valuation is not otherwise available, is valued
at fair value as determined in good faith by, or under the direction of, the
Board of Trustees.
Financial futures contracts, options thereon and options on stock indexes
are valued at the last trade price of the day. In the absence of a trade on a
given day, the value generally is used which is established by the exchange on
which the instrument is traded.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed at various times before the close
of business on each day on which the New York Stock Exchange is open. The values
of such securities used in computing net asset value per share are normally
determined as of such times. Trading of these securities may not take place on
every New York Stock Exchange business day and may take place on days which are
not business days in New York. The Trust calculates net asset value per share as
of the close of regular trading on the New York Stock Exchange on each day on
which that exchange is open. Therefore, such calculation does not take place
contemporaneously with the determination of the prices of many of the Funds'
securities used in such calculation. If events affecting the value of such
securities occur between the time when their price is determined and the time as
of which the Fund's net asset value is calculated, such securities may be valued
at fair value by or under the direction of the Board of Trustees.
48
<PAGE>
TAXES
The Trust intends that each Fund qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code ("Code"). This requires that
each Fund comply with certain requirements as to the nature of its income and
amounts of dividends and other distributions it pays. Also, in order to qualify
under Subchapter M, at the end of each quarter of a Fund's taxable year, (i) at
least 50% of the market value of the Fund's assets must be represented by cash
and cash items, U.S. Government securities, securities of other regulated
investment companies, and other securities, with such other securities limited,
in respect of any one issuer, to an amount that does not exceed 10% of the
voting securities of such issuer of 5% of the value of the Fund's total assets;
and (ii) not more than 25% of the value of its assets may be invested in the
securities (other than U.S. Government securities and securities of other RICs)
of any one issuer or two or more issuers which the Fund controls and which are
engaged in the same, similar or related trades or businesses.
The Trust also intends that each Fund comply with certain other
diversification requirements, promulgated under Section 817(h) of the Code.
Under these requirements, no more than 55% of the total value of the assets of
each Fund may be represented by any one investment, no more than 70% by any two
investments, no more than 80% by three investments and no more than 90% by four
investments. Generally, for these purposes, all securities of the same issuer
are treated as one investment. In the context of U.S. Government securities
(including any security that is issued, guaranteed or insured by the United
States or an instrumentality of the United States), each U.S. Government agency
or instrumentality is treated as a separate issuer.
Assuming the Funds qualify as regulated investment companies under
Subchapter M, they will not owe any income taxes. On the other hand, if a Fund
fails to qualify under Subchapter M, it may incur income tax liabilities, which
will negatively affect its investment performance.
Also, qualification under Subchapter M, as well as compliance with the
Section 817(h) diversification requirements, (among other things) are necessary
to secure the tax treatment intended for holders of variable annuity contracts
and variable life insurance policies that are supported by the Trust. Therefore,
any such failure to qualify under Subchapter M or to meet the diversification
standards under Section 817(h) could have serious adverse consequences for such
investors.
For a discussion of these and other tax implications of owning a variable
annuity contract or a variable life insurance policy for which the Fund serves
as the investment medium, please refer to the Prospectus for such contract or
policy attached at the front of this Prospectus.
Those Funds that invest substantial amounts of their assets in foreign
securities may be able to make an election to pass through to John Hancock,
JHVLICO or IPL any taxes withheld by foreign taxing jurisdictions on foreign
source income. Such an election will result in additional taxable income and
income tax to John Hancock. The amount of additional income tax, however, may be
more than offset by credits for the foreign taxes withheld, which are also
passed through.
INFORMATION ABOUT FUND PERFORMANCE
How Money Market Fund Yields Are Calculated
The Money Market Fund may advertise investment performance figures,
including its current yield and its effective yield.
The Money Market Fund's yield is its current investment income, expressed
in annualized terms. The current yield is based on a specified
seven-calendar-day period. It is computed by (1) determining the net change
(exclusive of capital changes) in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period, (2)
dividing the net change in account value by the value of the account at the
beginning of the base period to get the base period return, then (3) multiplying
the base period return by 52.15 (365 divided by 7). The resulting yield figure
is carried to the nearest hundredth of one percent.
49
<PAGE>
The calculations include the value of additional shares purchased with any
dividends paid on the original share and the value of dividends declared on both
the original share and any such additional shares. The capital changes excluded
from the calculation are realized capital gains and losses from the sale of
securities and unrealized appreciation and depreciation.
Compound (effective) yield for the Fund will be computed by dividing the
seven-day annualized yield (determined as above) by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1 from the result.
For the seven-day period ending December 31, 1999, the Money Market Fund's
current yield was 5.74%; its effective yield was 5.91%.
The Fund's yield will fluctuate depending upon market conditions, the type,
quality, and maturity of the instruments in the Fund, and its expenses.
Charges Under Variable Life Insurance and Variable Annuity Policies
Yield and total return quotations do not reflect any charges imposed on any
Separate Account or otherwise imposed pursuant to the variable life insurance
policies and variable annuity contracts that are supported by the Funds. (Those
charges are discussed in the prospectus for such policies or contracts.)
Therefore, the yield or total return of any Fund is not comparable to that of a
publicly available fund. Nor should yield or total return quotations be
considered representative of the Fund's yield or total return in any future
period.
LEGAL MATTERS
Freedman, Levy, Kroll & Simonds of Washington, D.C., advises the Trust on
certain legal matters relating to the Federal securities laws.
REPORTS TO CONTRACTHOLDERS
Annual and semi-annual reports containing financial statements of the
Trust, as well as any materials soliciting voting instructions for Trust shares,
will be sent to variable life insurance and annuity contractowners having an
interest in the Trust.
50
<PAGE>
APPENDIX A
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CORPORATE BOND RATINGS
Moody's Investors Service, Inc., describes its ratings for corporate bonds
as follows:
. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities, or fluctuation of protection elements may be of
greater amplitude, or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time in the future.
. Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
. Bonds which are rated Ba have speculative elements and their future
cannot be considered as well assured. The protection of interest and
principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Bonds in
this class are characterized by uncertainty of position.
. Bonds which are rated B generally lack characteristics of a desirable
investment; assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
. Bonds which are rated Caa are of poor standing. Issues may be in
default or there may be present elements of danger with respect to
principal or interest.
. Bonds which are rated Ca are speculative in a high degree. They are
often in default or have other marked shortcomings.
. Bonds which are rated C are the lowest rated class of bonds. They can
be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Standard & Poor's Corporation describes its ratings for corporate bonds as
follows:
. AAA - - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay
principal and interest.
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. AA -- Bonds rated AA also qualify as high-quality obligations.
Capacity to pay principal and interest is very strong, and in the
majority of instances, they differ from AAA issues only in small
degree.
. A -- Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
. BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and
interest for bonds in this category than for bonds in the A category.
. BB, B, CCC, CC, C -- Bonds rated in these categories are regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While this debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
. C1 -- This rating is reserved for income bonds on which no interest
is being paid.
. D -- Bonds rated D are in default and payment of interest and/or
repayment of principal is in arrears.
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PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust of John Hancock Variable Series Trust I, dated
February 21, 1988, included in Post-Effective Amendment No. 3 to this File
No. 33-2081, filed in April, 1988.
(b) By-Laws of John Hancock Variable Series Trust I, adopted April 12,
1988, included in Post-Effective Amendment No. 3 to this File No. 33-2081,
filed in April, 1988.
(c) Not Applicable.
(d) (1) Investment Management Agreement by and between John Hancock
Variable Series Trust I, and John Hancock Mutual Life Insurance Company
dated April 12, 1988 relating to the Initial Funds, included in Post-
Effective Amendment No. 4 to this File No. 33-2081, filed in April, 1989.
(2) Sub-Investment Management Agreement among John Hancock Variable Series
Trust I, Independence Investment Associates, Inc., and John Hancock
Mutual Life Insurance Company dated April 29, 1988, relating to the
Growth & Income, Large Cap Growth, and Managed Funds, included in
Post-Effective Amendment No. 4 to this File No. 33-2081, filed in
April, 1989.
(3) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Independence Investment Associates, and John Hancock Mutual
Life Insurance Company, pertaining to the Real Estate Equity Fund,
included in Post-Effective Amendment No. 9 to this File No. 33-2081,
filed on March 1, 1994.
(4) Investment Management Agreement by and between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company dated as
of April 12, 1988, relating to the Real Estate Equity and
International Equity Index Funds, included in Post-Effective Amendment
No. 3 to this File No. 33-2081, filed in April, 1988.
(5) Amendment dated as of May 1, 1998 to the Investment Management
Agreement dated as of April 12, 1998 relating to the Real Estate
Equity and International Equity Index Funds, included in
Post-Effective Amendment No. 19 to this File No. 33-2081, filed on May
1, 1998.
(6) Investment Management Agreement By and Between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company relating
to the Short-Term Bond and Small/Mid Cap Growth Funds, included in
Post- Effective Amendment No. 9 to this File No. 33-2081, filed on
March 1, 1994.
(7) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Independence Investment Associates, Inc. and John Hancock
Mutual Life Insurance Company relating to the Short-Term Bond Fund,
included in Post- Effective Amendment No. 9 to this File No. 33-2081,
filed on March 1, 1994.
(8) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Wellington Management Company, LLP and John
Hancock Mutual Life Insurance Company relating to the Small/Mid Cap
Growth Fund, included in Post-Effective Amendment No. 21 to this File
No. 33-2081, filed on May 3, 1999.
(9) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, John Hancock Advisers, Inc., and John Hancock Mutual Life
Insurance Company, relating to the Sovereign Bond Fund, included in
Post-Effective Amendment No. 11 to this File No. 33-2081, filed on
April 29, 1995.
(10) Investment Management Agreement By and Between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company relating
to the Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap Value,
Small Cap Growth, Small Cap Value, Global Bond, International
Opportunities, and International Balanced Funds, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
(11) Amendment, dated May 1, 1997, to the Investment Management Agreements
dated April 12, 1988, April 15, 1994, and March 14, 1996, to
reallocate Fund expenses and to reduce the advisory fee of the
Short-Term Bond Fund and the Equity Index Fund, included in
Post-Effective Amendment No. 16 to this File No. 33-2081, filed on May
1, 1997.
(12) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, T. Rowe Price Associates, Inc., and John Hancock Mutual Life
Insurance Company, relating to the Large Cap Value Fund, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
(13) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Janus Capital Corporation, and John Hancock Mutual Life
Insurance Company, relating to the Mid Cap Growth Fund, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
(14) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Neuberger & Berman Management, L.P., and John Hancock Mutual
Life Insurance Company, relating to the Mid Cap Value Fund, included
in Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
<PAGE>
(15) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, John Hancock Advisers, Inc., and John Hancock Mutual Life
Insurance Company, relating to the Small Cap Growth Fund, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
(16) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, INVESCO Management & Research, and John Hancock Mutual Life
Insurance Company, relating to the Small Cap Value Fund, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
(17) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, J.P. Morgan Investment Management, Inc., and John Hancock
Mutual Life Insurance Company, relating to the Global Bond Fund,
included in Post-Effective Amendment No. 13 to this File No. 33-2081,
filed on April 30, 1996.
(18) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Rowe Price-Fleming International, Inc., and John Hancock
Mutual Life Insurance Company, relating to the International
Opportunities Fund, included in Post-Effective Amendment No. 13 to
this File No. 33-2081, filed on April 30, 1996.
(19) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Brinson Partners, Inc., and John Hancock Mutual Life
Insurance Company, relating to the International Balanced Fund,
included in Post-Effective Amendment No. 13 to this File No. 33-2081,
filed on April 30, 1996.
(20) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, State Street Bank & Trust Company, and John Hancock Mutual
Life Insurance Company, relating to the Equity Index Fund, included in
Post- Effective Amendment No. 16 to this File No. 33-2081, filed on
May 1, 1997.
(21) Amendment to Sub-Investment Management Agreement among John Hancock
Variable Series Trust I, State Street Bank and Trust Company, and John
Hancock Mutual Life Insurance Company, included in Post-Effective
Amendment No. 19 to this File No. 33-2081, filed on May 1, 1998.
(22) Investment Management Agreement dated as of April 14, 1998 By and
Between John Hancock Variable Series Trust I and John Hancock Mutual
Life Insurance Company relating to the Small/Mid Cap CORE, Global
Equity, International Equity Index, Emerging Markets Equity, Bond
Index, and High Yield Bond Fund, included in Post-Effective Amendment
No. 19 to this File No. 33-2081, filed on May 1, 1998.
(23) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Goldman Sachs Asset Management, and John Hancock Mutual Life
Insurance Company, relating to the Small/Mid Cap CORE Fund, included
in Post-Effective Amendment No. 21 to this File No. 33-2081, filed on
May 3, 1999.
(24) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Scudder Kemper Investments, Inc., and John Hancock Mutual
Life Insurance Company, relating to the Global Equity Fund, included
in Post- Effective Amendment No. 21 to this File No. 33-2081, filed on
May 3, 1999.
(25) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Independence International Associates, Inc., and John Hancock
Mutual Life Insurance Company, relating to the International Equity
Index Fund, included in Post-Effective Amendment No. 21 to this File
No. 33- 02081, filed on May 3, 1999.
(26) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Mellon Bond Associates, and John Hancock Mutual Life
Insurance Company, relating to the Bond Index Fund, included in
Post-Effective Amendment No. 19 to this File No. 33-2081, filed on May
1, 1998.
(27) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Wellington Management Company, LLP, and John Hancock Mutual
Life Insurance Company, relating to the High Yield Bond Fund, included
in Post-Effective Amendment No. 19 to this File No. 33-2081, filed on
May 1, 1998.
(28) Amendment No. 2 to the Investment Management Agreement dated as of
March 14, 1996 By and Between John Hancock Variable Series Trust I and
John Hancock Mutual Life Insurance Company included in Post-Effective
Amendment No. 21 to this File No. 33-2081 filed on May 3, 1999.
(29) Amendment No. 3 to the Investment Management Agreement dated as of
March 14, 1996 By and Between John Hancock Variable Series Trust I and
John Hancock Mutual Life Insurance Company included in Post-Effective
Amendment No. 21 to this File No. 33-2081 filed on May 3, 1999.
(30) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Morgan Stanley Dean Witter Advisors, Inc.,
and John Hancock Mutual Life Insurance Company, relating to the
Emerging Markets Equity Fund included in Post-Effective Amendment No.
23 to this File No. 33-2081 filed on August 9, 1999.
(31) Investment Management Agreement By and Between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company relating
to the Large Cap Aggressive Growth, Fundamental Mid Cap Growth,
International Equity, Aggressive Balanced, Large Cap Value CORE,
Large/Mid Cap Value, Mid Cap Blend, and Small/Mid Cap Value Funds
included in Post-Effective Amendment No. 23 to this File No. 33-2081
filed on August 9, 1999.
<PAGE>
(32) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Alliance Capital Management L.P., and John
Hancock Mutual Life Insurance Company relating to the Large Cap
Aggressive Growth Fund, included in Post-Effective Amendment No. 23 to
this File No. 33-2081 filed on August 9, 1999.
(33) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, OppenheimerFunds, Inc., and John Hancock
Mutual Life Insurance Company relating to the Fundamental Mid Cap
Growth Fund included in Post-Effective Amendment No. 23 to this File
No. 33-2081 filed on August 9, 1999.
(34) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Goldman Sachs Asset Management, and John
Hancock Mutual Life Insurance Company relating to the International
Equity Fund included in Post-Effective Amendment No. 23 to this File
No. 33-2081 filed on August 9, 1999.
(35) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Goldman Sachs Asset Management, and John
Hancock Mutual Life Insurance Company relating to the Large Cap Value
CORE Fund included in Post-Effective Amendment No. 23 to this File No.
33-2081 filed on August 9, 1999.
(36) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Independence Investment Associates, Inc., and
John Hancock Mutual Life Insurance Company relating to the Aggressive
Balanced Fund included in Post-Effective Amendment No. 23 to this File
No. 33-2081 filed on August 9, 1999.
(37) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Independence Investment Associates, Inc., and
John Hancock Mutual Life Insurance Company relating to the Mid Cap
Blend Fund included in Post-Effective Amendment No. 23 to this File
No. 33-2081 filed on August 9, 1999.
(38) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Wellington Management Company, LLP, and John
Hancock Mutual Life Insurance Company relating to the Large/Mid Cap
Value Fund included in Post-Effective Amendment No. 23 to this File
No. 33-2081 filed on August 9, 1999.
(39) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, The Boston Company Asset Management Company,
LLC, and John Hancock Mutual Life Insurance Company relating to the
Small/Mid Cap Value Fund included in Post-Effective Amendment No. 23
to this File No. 33-2081 filed on August 9, 1999.
(40) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Federated Investment Management Company and
John Hancock Life Insurance Company relating to the American Leaders
Large Cap Value Fund and the Core Bond Fund, filed herewith.
(41) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Morgan Stanley Dean Witter Investment
Management Inc., and John Hancock Life Insurance Company relating to
the Real Estate Equity Fund, to be Filed by amendment.
(e) (1) Underwriting and Administrative Services Agreement by and between
John Hancock Variable Series Trust I and John Hancock Mutual Life
Insurance Company, dated April 29, 1988, included in Post-Effective
Amendment No. 4 to this File No. 33-2081, filed in April, 1989.
(2) Underwriting and Indemnity Agreement among John Hancock Variable
Series Trust I, John Hancock Distributors, Inc., and John Hancock
Mutual Life Insurance Company, previously filed electronically on
February 28, 1997.
(f) Not Applicable.
(g) (1) Custodian Agreement Between John Hancock Variable Series Trust I
and State Street Bank and Trust Company, dated January 30, 1995,
relating to the International Equity Index and Small/Mid Cap CORE
Fund, included in Post-Effective Amendment No. 10 to this File No.
33-2081, filed on March 2, 1995.
(2) Amendment dated as of March 18, 1996 to Custodian Agreement dated
January 30, 1995, between John Hancock Variable Series Trust I and
State Street Bank and Trust Company, expanding the Agreement to cover
additional Funds, included in Post-Effective Amendment No. 13 to this
File No. 33-2081, filed on April 30, 1996.
(3) Amendment dated as of April 14, 1998 to Custodian Agreement dated
January 30, 1995, between John Hancock Variable Series Trust I and
State Street Bank and Trust Company, expanding this agreement to cover
additional Funds, included in Post-Effective Amendment No. 19 to this
File No. 33-2081, filed on May 1, 1998.
(4) Form of Amendment dated as of July 28, 1999 to Custodian Agreement
dated January 30, 1995, between John Hancock Variable Series Trust I
and State Street Bank and Trust Company, expanding this agreement to
cover additional Funds included in Post-Effective Amendment No. 23 to
this File No. 33-2081 filed on August 9, 1999.
(5) Amendment dated as of December 18, 1998 to Custodian Agreement
dated January 30, 1995, between John Hancock Variable Series Trust I
and State Street Bank and Trust Company, addressing "eligible foreign
custodians" within the meaning of Rule 17f-5, as amended, incorporated
by reference to Post-Effective Amendment No. 24 to this File No. 33-
2081, Filed on April 6, 2000.
(h) Amendment dated April 29, 1988 to Transfer Agency Agreement by and
between John Hancock Variable Series Fund I, Inc., and John Hancock Mutual
Life Insurance Company, January 27, 1986, which was priorly included in
Exhibit 9 to Pre-Effective Amendment No. 1 to this File No. 33-2081, filed
March 13, 1986, included in Post-Effective Amendment No. 4 to this File No.
33-2081, filed in April, 1989.
(i) Opinion and Consent of Counsel regarding the legality of the securities
being registered incorporated by reference to Post-Effective Amendment
No. 26 to this File No. 33-2081, Filed herewith.
(j) (1) Consent of Ernst & Young LLP, filed herewith.
<PAGE>
(j) (2) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Code of Ethics, revised February 16, 2000, adopted by the John Hancock
Variable Series Trust I, its Investment Adviser and Principal Underwriter,
incorporated by reference to Post-Effective Amendment No. 24 to this File
No. 33-2081, Filed on April 6, 2000.
(q) Diagram of Subsidiaries of John Hancock Mutual Life Insurance Company
(incorporated by reference from Exhibit 13 to Post-Effective Amendment No.
5 to Form N-4 Registration Statement of John Hancock Variable Annuity
Account H (File No. 333-08345) filed April 29, 1999).
(r) Powers of Attorney for Elizabeth G. Cook, Diane C. Kessler, Michele G.
Van Leer, Hassell H. McClellan and Robert F. Verdonck, included in
Post-Effective Amenement No. 25, to this File No. 33-2081 on
May 11, 2000.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Currently, shares of the Registrant are sold only to (1) John Hancock Variable
Life Accounts U, V and S, separate investment accounts created pursuant to
Massachusetts law, to fund variable life insurance policies issued by John
Hancock Variable Life Insurance Company ("JHVLICO"), a stock life insurance
company organized under the laws of Massachusetts; (2) John Hancock Variable
Annuity Accounts H, U and V, separate investment accounts created pursuant to
Massachusetts law to fund variable annuity contracts issued by John Hancock Life
Insurance Company, ("John Hancock"), a life insurance company organized under
the laws of Massachusetts; (3) John Hancock Variable Life Insurance Account UV,
a separate investment account created pursuant to Massachusetts law to fund
variable life insurance policies issued by John Hancock; (4) John Hancock
Variable Annuity Account I and JF, separate investment accounts created pursuant
to Massachusetts law to fund variable annuity contracts issued by JHVLICO; and
(5) Separate Account IPL-1, a separate investment account created pursuant to
Delaware law to fund variable life insurance policies issued by Investors
Partner Life Insurance Company, ("IPL"), a life insurance company organized
under the laws of Delaware. (The ten variable accounts are hereinafter referred
to as "Separate Accounts.") The purchasers of variable life insurance policies
and variable annuity contracts issued in connection with such Separate Accounts
will have the opportunity to instruct JHVLICO, John Hancock and IPL,
respectively, with regard to the voting of the Registrant's shares held by the
Separate Account as to certain matters. Subject to such voting instructions,
John Hancock, JHVLICO and IPL directly control the Registrant, and the Separate
Accounts currently are its sole shareholders.
Subsequently, shares of the Registrant may be sold to other separate investment
accounts of John Hancock, JHVLICO and IPL. A diagram of the subsidiaries of John
Hancock is incorporated by reference to File No. 333-08345, Post-Effective
Amendment No. 5, Filed on April 28, 1999.
ITEM 25. INDEMNIFICATION
Reference is made to Article VI of the Registrant's By-Laws (Exhibit 2 to
Post-Effective Amendment No. 3 to this Registration Statement filed in April,
1988), which provides that the Trust shall indemnify or advance any expenses to
the trustees, shareholders, officers, or employees of the Trust to the extent
set forth in the Declaration of Trust.
Sections 6.3 through 6.17 of the Declaration of Trust (Exhibit 1 to Post-
Effective Amendment No. 3 to this Registration Statement filed in April, 1988),
relate to the indemnification of trustees, shareholders, officers and employees
and are hereby incorporated by reference. It is provided that the Registrant
shall indemnify any Trustee made a party to any proceeding by reason of service
in that capacity if the Trustee (a) acted in good faith and (b) reasonably
believed, (1) in the case of conduct in the Trustee's official capacity with the
Trust, that the conduct was in the best interest of the Trust and (2) in all
other cases, that the conduct was at least not opposed to the best interests of
the Trust, and (c) in the case of any criminal proceeding, the Trust shall
indemnify the Trustee if the Trustee acted in good faith and had no reasonable
cause to believe that the conduct was unlawful. Indemnification may not be made
by the Trust unless authorized in each case by a determination by the Board of
Trustees or by special legal counsel or by the shareholders. Neither
indemnification nor advancement of expenses may be made if the Trustee or
officer has incurred liability by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of duties involved in the conduct of his
office ("Disabling Conduct"). The means for determining whether indemnification
shall be made shall be (1) a final decision on the merits by a court or other
body before whom the proceeding was brought that the person to be indemnified
was not liable by reason of Disabling Conduct or (2) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that
such person was not liable by reason of Disabling Conduct. Such latter
determination may be made either (a) by the vote of a majority of a quorum of
Trustees who are neither "interested persons" of the Trust (as defined in the
1940 Act, as amended) nor parties to the proceeding or (b) by an independent
legal counsel in a written opinion. The advancement of legal expenses may not
occur unless the Trustee or officer agrees to repay the advance (unless it is
ultimately determined that he is entitled to indemnification) and at least one
of three conditions is satisfied: (1) he provides security for his agreement to
repay, (2) the Registrant is insured against loss by reason of lawful advances,
or (3) a majority of a quorum the Trustees who are not interested persons and
are not parties to the proceedings, or independent counsel in a written opinion,
determine that there is reason to believe that the Trustee or officer will be
found entitled to indemnification.
<PAGE>
Similar types of provisions dealing with the indemnification of the Registrant's
officers and directors is included in several exhibits attached to the original
filing and subsequent amendments to this Registration Statement: specifically,
Section 14 of the Investment Management Agreement by and between John Hancock
Variable Series Trust I and John Hancock Mutual Life Insurance Company (Exhibit
5(k) to Post-Effective Amendment No. 13 to this Registration Statement filed
April 30, 1996), Section 14 of the Investment Management Agreement by and
between John Hancock Variable Series Trust I and John Hancock Mutual Life
Insurance Company (Exhibit 5(g) to Post-Effective Amendment No. 9 to this
Registration Statement filed March 1, 1994), Section 14 of the Investment
Management Agreement by and between John Hancock Variable Series Fund I, Inc.,
and John Hancock Mutual Life Insurance Company (Exhibit 5 Post-Effective
Amendment No. 4 to this Registration Statement, filed in April, 1989), Section
14 of the Investment Management Agreement by and between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company (Exhibit 5(v) to
Post-Effective Amendment No. 19 to this Registration Statement filed in 1998),
Section 7 of the Underwriting and Administrative Services Agreement by and
between John Hancock Variable Series Trust I, and John Hancock Mutual Life
Insurance Company (Exhibit 6 to Post-Effective Amendment No. 4 to this
Registration Statement filed in April, 1989), and Section 15 of the Transfer
Agency Agreement by and between John Hancock Variable Series Fund I, Inc., and
John Hancock Mutual Life Insurance Company (Exhibit 9 to Pre-Effective Amendment
No. 1 to this Registration Statement filed March 13, 1986), and Section 6 of the
Underwriting and Indemnity Agreement By and Among John Hancock Series Trust,
John Hancock Distributors, Inc., and John Hancock Mutual Life Insurance Company
(Exhibit 6.b to Post-Effective Amendment No. 14 to this Registration Statement
filed February 28, 1997).
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers, and controlling persons of the
Registrant pursuant to the Registrant's By-Laws or otherwise, the Registrant has
been advised that, in the opinion of the Securities and Exchange Commission (the
"Commission"), such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, then the Registrant will,
unless in the opinion of its counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information pertaining to any business and other connections of Registrant's
investment adviser, John Hancock, is hereby incorporated by reference from the
section of Part A of this Form N-1A (the "Prospectus") captioned "Management of
the Fund," Item 7 of Part II of John Hancock's Form ADV [filed separately with
the Commission (File No. 801-8352)]. Information pertaining to any business and
other connections of Registrant's sub-investment advisers, Independence
Investment Associates, Inc. ("IIA"), John Hancock Advisers Inc. ("Advisers"), T.
Rowe Price Associates, Inc. ("T. Rowe Price"), Janus Capital Corporation
("Janus"), Neuberger Berman, LLC ("Neuberger Berman"), INVESCO, Inc.
("INVESCO"), J.P. Morgan Investment Management Inc. ("JPMIM"), Rowe
Price-Fleming International, Inc. ("Rowe Price-Fleming"), Brinson Partners, Inc.
("Brinson"), Goldman Sachs Asset Management ("Goldman Sachs"), Scudder Kemper
Investments, Inc.("Scudder Kemper"), Independence International Associates, Inc.
("Independence International"), Morgan Stanley Dean Witter Investment
Management, Inc. ("Morgan Stanley"), Mellon Bond Associates, LLP ("Mellon"),
Alliance Capital Management L.P. ("Alliance"), OppenheimerFunds, Inc.
("Oppenheimer"), The Boston Company Asset Management, LLC ("Boston"), and
Wellington Management Company, LLP ("Wellington"), and Federated Investment
Company ("Federated") is incorporated by reference from the section of the
Prospectus captioned "Management of the Fund" and Item 7 of Part II of the Forms
ADV of IIA (File No. 801-15908), Advisers (File No. 801-8124), T. Rowe Price
(File No. 801- 856), Janus (File No. 801-13991), Neuberger Berman (File No. 801-
3908), INVESCO (File No. 801-1596), JPMIM (File No. 801-21011), Rowe Price-
Fleming (File No. 801-14713), Brinson (File No. 801-34910) Goldman Sachs (File
No. 801-16048), Scudder Kemper (File No. 801-252), Independence International
(File No. 801-28785), Morgan Stanley (File No. 801-15757), Mellon (File No. 801-
50865), Alliance (File No. 801-56720), Oppenheimer (File No. 801-8253), Boston
(File No. 801-6829), Wellington (File No. 801-15908) and Federated
(File No. 801-34612) filed separately with the Commission. The other businesses,
professions, vocations, and employment of a substantial nature, during the past
two years, of the directors and officers of John Hancock, IIA, Advisers, T. Rowe
Price, Janus, Neuberger Berman, INVESCO, JPMIM, Rowe Price-Fleming, Brinson
Goldman Sachs, Scudder Kemper, Independence International, Morgan Stanley,
Mellon, Alliance, Oppenheimer, Boston, and Wellington are hereby incorporated by
reference, respectively, from Schedules A and D of John Hancock's Form ADV and
from Schedules A and D of the Forms ADV of the sub-investment advisers.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Signator Investors, Inc. ("Signator") acts as principal underwriter and
distributor of the Registrant's shares on a best-efforts basis and receives
no fee or commission for its underwriting and distribution services.
Signator does not act as a principal underwriter, distributor, or
investment advisor for any other investment company, except that Signator
serves as the principal underwriter for the separate accounts referred to
in the response to Item 24 above.
(b) The name and principal business address of each officer, director, or
partner of Signator as well as their positions and offices with Signator
are hereby incorporated by reference from Schedules A and D of Signator's
Form BD [filed separately with the Commission (Firm CRD No. 468)]. None of
the directors or partners of Signator hold positions with the Registrant.
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The following entities prepare, maintain, and preserve the records required by
Section 31(a) of the Act for the Registrant through written agreements between
the parties to the effect that such services will be provided to the Registrant
for such periods prescribed by the Rules and Regulations of the Commission under
the Act and such records will be surrendered promptly on request:
<PAGE>
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110 serves as custodian for the Registrant and in such capacity keeps records
regarding securities in transfer, bank statements and cancelled checks.
John Hancock, John Hancock Place, P.O. Box 111, Boston, Massachusetts 02117,
will serve as Registrant's transfer agent and investment adviser, and, in such
capacities, will keep records regarding shareholders' account records, cancelled
stock certificates, and all other records required by Section 31(a) of the Act.
John Hancock, as Investment Adviser will keep records related to transactions in
the Money Market Fund.
IIA, 53 State Street, Boston, Massachusetts 02109, will serve as Registrant's
sub-investment manager and, in such capacity, will keep records related to
transactions in portfolio securities of the Growth & Income, Large Cap Growth,
Managed, Real Estate Equity, Aggressive Balanced, Mid Cap Blend, and Short-Term
Bond Funds.
Advisers, 101 Huntington Avenue, Boston, Massachusetts 02199, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Sovereign Bond and Small
Cap Growth Funds.
Alliance, 1345 Avenue of the Americas, New York, New York 10105, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Large Cap Aggressive
Growth Fund.
Advisers, 101 Huntington Avenue, Boston, Massachusetts 02199, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Special Opportunities,
Sovereign Bond, and Small Cap Growth Funds.
State Street, Two International Place, Boston, Massachusetts 02110, will serve
as Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Equity Index Fund.
T. Rowe Price, 100 East Pratt Street, Baltimore, Maryland 21202, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Large Cap Value Fund.
Janus, 100 Fillmore Street, Denver, Colorado 80206, will serve as Registrant's
sub-investment manager and, in such capacity, will keep records related to
transactions in portfolio securities of the Mid Cap Growth Fund.
Neuberger Berman, 605 Third Avenue, New York, New York 10158, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Mid Cap Value Fund.
INVESCO, 101 Federal Street, Boston, Massachusetts 02110, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Small Cap Value Fund.
JPMIM, King Street, London, England SW1Y6XA, will serve as Registrant's
sub-investment manager and, in such capacity, will keep records related to
transactions in portfolio securities of the Global Bond Fund.
Rowe Price-Fleming, 100 East Pratt Street, Baltimore, Maryland 21202, will serve
as Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the International
Opportunities Fund.
Brinson, 209 South LaSalle Street, Chicago, Illinois 60604, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the International Balanced
Fund.
Goldman Sachs, 32 Old Slip, New York, New York 10005, will serve as Registrant's
sub-investment manager and, in such capacity, will keep the records related to
transactions in the portfolio securities of the Small/Mid Cap CORE,
International Equity, and Large Cap Value CORE Funds.
Scudder Kemper, 345 Park Avenue, New York, New York 10154, will serve as
Registrant's sub-investment manager and, in such capacity, will keep the records
related to transactions in the portfolio securities of the Global Equity Fund.
Independence International, 53 State Street, Boston, Massachusetts 02109, will
serve as Registrant's sub-investment manager and, in such capacity, will keep
the records related to transactions in the portfolio securities of the
International Equity Index Fund.
Morgan Stanley, 1221 Avenue of the Americas, New York, New York 10020, will
serve as Registrant's sub-investment manager and, in such capacity, will keep
the records related to transactions in the portfolio securities of the Emerging
Markets Equity Fund and the Real Estate Equity Fund.
Mellon, One Mellon Bank Center, Suite 4135, Pittsburgh, Pennsylvania 15258, will
serve as Registrant's sub-investment manager and, in such capacity, will keep
the records related to transactions in the portfolio securities of the Bond
Index Fund.
Oppenheimer, Two World Trade Center, New York, New York, 10048, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Fundamental Mid Cap
Growth Fund.
Boston, One Boston Place, Boston, Massachusetts 02108, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Small/Mid Cap Value Fund.
Wellington, 75 State Street, Boston, Massachusetts 02109, will serve as
Registrant's sub-investment manager and, in such capacity, will keep the records
related to transactions in the portfolio securities of the Small/Mid Cap Growth,
High Yield Bond, and Large/Mid Cap Value Funds.
Federated, Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222,
will serve as Registrant's sub-investment manager and, in such capacity, will
keep the records related to transactions in the portfolio securities of the
American Leaders Large Cap Value Fund and the Core Bond Fund.
ITEM 29. MANAGEMENT SERVICES
<PAGE>
Not applicable.
ITEM 30. UNDERTAKINGS
Registrant undertakes to furnish to each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to shareholders, upon
request and without charge.
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS
AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHLAF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BOSTON, AND THE
COMMONWEALTH OF MASSACHUSETTS, ON THE 23RD DAY OF JUNE, 2000.
John Hancock Variable Series Trust I
By: /s/ Thomas J. Lee
-----------------
Thomas J. Lee, Vice Chairman, President and Trustee
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-EFFECTIVE
AMENDMENT TO ITS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLWOIING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE DATE
By: /s/ Raymond F. Skiba June 23, 2000
--------------------
Raymond F. Skiba
Treasurer (Principal Financial
and Accounting Officer)
By: /s/ Thomas J. Lee June 23, 2000
-----------------
Thomas J. Lee
Vice Chairman, President and
Trustee (Acting Principal
Executive Officer)
For himself and as attorney-in-fact for:
Michele G. Van Leer, Chairman
Elizabeth G. Cook, Trustee
Diane C. Kessler, Trustee
Robert F. Verdonck, Trustee
Hassell H. McClellan, Trustee
